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How To Finance a Subway Franchise

Subway is a restaurant chain with over 21,000 locations in the U.S., known for marketing its submarine sandwiches as healthier alternatives to other fast-food options. Franchisees pulled in an average $416,860 in sales in 2017, according to industry publication QSR magazine. That may not sound like a high number but Subway has relatively low startup costs and net worth requirements compared with other restaurant chains. What’s more worrisome is that 900+ locations closed in 2017. In the following year, 1,000 additional Subway locations were shut down.

While you may want to consider other sub shop or fast-food brands when choosing your franchiser, applications for new locations are currently open with Subway. It should be noted that franchisees have not always been happy; Subway has met long legal battles with its franchisees over its $5 footlong marketing campaign, as reported by the New York Post.

We’ll cover some of the numbers that reveal the costs of opening a Subway as a franchisee, and how the restaurant chain has been struggling over the past several years as sales dip and locations shutter across the United States.

Costs of buying a Subway franchise

  • Franchising fee: $15,000
  • Initial investment: $116,000 to $263,000

These costs are comparatively low for the industry, but as we’ve already discussed, sales may be lower as well. For example, competitor Jimmy John’s has an average of $796,970 in gross sales at each location. But to open one, the company estimates it costs between $313,000 and $556,100. Rival sandwich shop Jersey Mike’s brought in $725,820 in sales per location and Firehouse Subs’ was $662,370 in 2017.

Over the past several years, Subway has been closing more U.S. franchises than opening them. This at a time when Jimmy John’s, Jersey Mike’s and Firehouse Subs have expanded.

Costs of owning a Subway franchise

  • Royalties: 8% of gross sales per week
  • Advertising fee: 4.5% of gross sales per week
  • Rent/license fee: $1,000-$6,000 per month
  • Equipment lease: $2.70 per month per $100

After you open your store for business, there are continuing costs you’ll be required to pay to Subway. The best way to find out what is required of franchisees is to read the Franchise Disclosure Document (FDD), a legal document required by the Federal Trade Commission. The FDD describes the franchiser’s financial health, franchisee turnover rate, and provides contact information for former and current franchisees.

It’s a good idea to compare royalty fees and other costs when evaluating Subway and other franchises. Subway also makes its equipment available through lease. You should also familiarize yourself with Subway’s real estate leasing policies. If you don’t own the real estate, Subway may require the real estate owner to lease the property to them, and then Subway will turn around and lease it to you. You should also ask whether the chain gives territory exclusivity or allows multiple locations in proximity to one another.

Becoming a Subway franchise

While there’s a lot of research you should do before signing any agreements, becoming a franchisee with Subway is a relatively straightforward process with corporate support along the way. In order to become a franchisee, you will have to attend a two-week training in Milford, Conn. where Subway parent company Doctor’s Associates Inc. has its headquarters.

There, you will learn the operating system, which you’ll implement when you get back to your restaurant. To support you in implementing this system, Subway has local development offices and an e-Learning portal for ongoing training.

It is important to note that in some areas, local development agents, who supervise and support Subway stores, are also local franchisees themselves. That means that in some situations, as reported by The New York Times, current and former franchisees have alleged that their local development agents sabotaged the franchisees’ businesses in order to benefit themselves.

The ease of opening a store and getting training isn’t unique to Subway. Other brands, such as Jersey Mike’s, also offer extensive support to franchisees and offer higher gross sales potential. While admittedly more expensive to open with a total initial investment of $237,419-$766,971, Jersey Mike’s locations bring in significantly more in terms of sales on average and require a minimum of 8-10 weeks of hands-on corporate training.

How to finance a Subway franchise

Perhaps one of the biggest remaining draws to opening a Subway franchise is the low barrier to entry. While individual stores may not do as much volume as the direct competition, they are also far cheaper to open. They also tend to be far easier to finance when you look at eligibility requirements. For example, Jimmy John’s requires an $80,000 upfront investment in cash and an individual net worth of at least $300,000.

In-house financing

Subway also offers in-house financing where many rivals do not. The three lender options offered by Subway: Ascentium Capital, JenCas Financial Inc. and IPC Franchise Financing require a 650 credit score or higher, though IPC Franchise Financing will give you a better look if your score is 720 or higher.

IPC Franchise Financing is most explicit in its requirements, also noting its strong preference for new franchisees who have restaurant and/or business experience and its requirement of a 20-25% down payment. Even with this down payment requirement, 20-25% of opening a Subway in the top range provided by the company would still only require $65,750.

If you don’t have restaurant experience, you may still be able to obtain financing through one of Subway’s approved lenders. Ascentium Capital, LLC does consider new franchisees without restaurant experience. However, in its place, it would like to see experience with some type of franchise or evidence that you already own your own business.

SBA loans

Subway is an approved franchise by the Small Business Administration (SBA), but in order to receiving funding backed the federal agency, Subway must be leasing directly to you as its franchisee. The SBA’s popular 7(a) loan program provides amounts up to $5 million up to 25 years. The 504/CDC program offers loans up to $5.5 million with terms ranging from 10 to 25 years. SBA loans are known for their competitive rates, but the application process can be strenuous.

In recent months, Sen. Catherine Cortez Masto of Nevada has written a letter to the SBA challenging Subway’s inclusion in the SBA franchise directory, according to reporting by Restaurant Business Magazine, citing hostile company policies toward franchisees and the $5 footlong promotional debacle as reasons.

Traditional business loans

You could also pursue a traditional business loan from a bank, credit union or alternative online lender. Here are some of the most likely financial institutions to offer you a commercial loan for franchising purposes. The most favorable small business loans are likely to require some type of collateral — like your home — in order to back what you’re borrowing. Online lenders may have less stringent requirements than traditional banks, but are often more expensive.

Is a Subway franchise right for you?

A Subway franchise may be one of the least expensive franchises to open, but potential franchisees should weigh the pros and cons. A string of restaurant closures and disputes with its franchisees may give you pause. You need to do your homework by researching Subway’s finances, including sales, revenue, net income and costs for individual stores, and asking the right questions. If you do decide to go ahead with a Subway franchise and need to borrow funds, compare and evaluate loans to pick the best one with a reputable lender that offers the most competitive rates and terms.

You could also look to Subway’s direct competition, such as Jersey Mikey’s, Firehouse Subs or Jimmy John’s. While these options are more likely to have higher financial requirements as the initial investment is larger, these companies may have a more solid financial footing. One of the best ways to evaluate a company’s financial health and its requirements for franchisees is to read its Franchise Disclosure Document.

If you’re willing to branch out even further into the wider world of fast food, your options become increasingly varied. Do your research, and if you decide to open a Subway franchise, do so with your eyes wide open.

The information in this article is accurate as of the date of publishing. 

 

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