A franchise loan can make business ownership a reality. Franchises offer a tested business model that many owners appreciate. The more than 750,000 franchises in the U.S. alone are possible thanks to this model.

 

However, many franchise business loans have high startup costs to get things off the ground. Using a franchisor’s well-known brand is a tremendous advantage to getting your start in business. Couple that branding with an effective business strategy, and you’re off to the races. 

 

Meanwhile, there are some sizable initial investments you might need to make to purchase and launch your franchise. 

 

How to go about obtaining a franchise loan is something anyone can learn. The financing options vary and include the following:

  • Franchise bank loans

  • Franchise SBA 7(a) loans

  • Franchisor financing

  • Alternative Financing

  • Friends and family franchise loan

Numerous paths to ownership can support a future of freedom and stable earnings. So let’s jump right into it with the classic franchise bank loan!

 

How to Obtain a Bank Loan for a Franchise

 

Have you considered purchasing a franchise but lacking the necessary funds? Maybe you think the 42% higher success rate of franchises over other small businesses is enticing. But, in essence, a franchise loan is a sort of financing that is exclusively available to people who want to own a franchise and need to borrow money to do so.

 

You can arrange with commercial banks or credit unions to borrow money from a franchise business loan. Like with other loans, the lender will evaluate your creditworthiness by looking at your credit history and net worth. You may need to put up collateral to get your bank franchise loan.

 

These franchise loans will likely have the most affordable interest rates and repayment terms. However, obtaining a franchise loan from a bank or credit union will require a financially solid standing, several years in business, and excellent credit.

Since lenders can see the track record of the current business, acquiring a franchise business loan to buy an established business is typically easier than getting startup financing. However, your personal credit history, professional experience, and knowledge of the acquisition company are still very important.

 

The franchise loan provider may utilize your personal records to assess your financial situation, business background, and future objectives for the company. 

 

These records may include the following:

 

  • Financial statements for any other businesses you may have

  • Personal tax returns

  • Personal bank records

  • A letter of intent

  • And a business plan

 

Supplying these items can ensure your approval for a franchise bank loan.

 

Benefits and Advantages of a Franchise Bank Loan

 

Most likely, taking out a franchise business loan while you launch a new franchise is a wise financial choice. This decision is a solid one unless you have significant financial resources. Although franchise loans have costs of their own, most notably the interest you pay, they act as a safety net by preserving more of your own resources.

 

Launching your business with the same institution that services other financial needs is an advantage. Your business credit can be under management with the same lender. Purchasing supplies or equipment can become simpler when more finance decisions are under one roof.

 

Solving cash flow issues a bit sooner is more likely when you have a standing relationship with a bank or credit union.

 

In other words, it makes sense strategically to ensure you have a safety net in place in case the worst happens. Self-financing individuals risk losing all their retirement assets and their franchise business. A franchise business loan helps protect from that outcome.

 

You are still liable for the debt if your franchise fails, but you will still have your own resources. In addition, the legal protections from lenders seizing personal assets are a tremendous advantage of a franchise bank loan. 

Obtaining an SBA 7(a) Loan for a Franchise

 

Participating lenders, typically banks and credit unions, offer SBA loans, which are then partially guaranteed by the SBA. In addition, franchise financing is possible with SBA CDC/504 loans as well as SBA 7(a) loans.

 

While SBA CDC/504 loans must be used for sizable fixed-asset purchases, SBA 7(a) loans can be used for various reasons. However, both of these SBA loans have protracted repayment durations and low-interest rates.

 

You’ll usually need good credit, multiple years in business, and solid finances to qualify for an SBA franchise loan. Your franchise must also be included in the SBA Franchise Directory to qualify for funding.

 

Fill out SBA Form 1919 and deliver it to a participating lender for the SBA. To complete your background information, fill out SBA Forms 413 and 912. These aid SBA and other interested parties in determining your eligibility for a franchise business loan.

 

Although SBA 7(a) loans can be hard to qualify for, they are an ideal option for business financing due to their long repayment terms and low-interest rates. Additionally, 7(a) loans can be utilized for various things, like working capital, business growth, or buying supplies and equipment.

 

Benefits and Advantages of an SBA 7(a) Loan for a Franchise

 

An excellent choice for a franchise loan with loan amounts up to $5 million is the SBA 7(a). Thanks to these lending quantities, you can stick to a more substantial budget for purchases and operations.

 

An SBA 7(a) loan for a franchise can also have very benevolent loan payback terms. Significant advantages include seven years for working capital, ten years for new equipment, and even up to 25 years for real estate.

 

Additionally, the meager borrowing rates give franchise business loan borrowers more money to spend. Increasing company readiness can promote growth and result in long-term cost savings.

 

Obtaining Franchisor Financing as a Business Loan

 

Some franchisors offer different types of franchise finance. For example, to assist franchisees in obtaining loans, franchisors may provide reduced or waived fees and direct funding, or they may collaborate with outside lenders.

Many companies offer a discount on the franchise price to first-time minority-owned businesses. Additionally, they may waive the franchise fee for qualified veterans.

 

However, not all franchisors offer money, and the choices differ depending on the brand. If a franchisor offers to finance franchisees, you can visit their website or contact them directly for further details.

 

Direct communication with your potential franchisor should be your first step if you require financing to buy a franchise.

 

Many businesses using the franchise model provide specialized financing options made just for their franchisees, either through alliances with particular lenders or by providing funds directly from the company. This option is among the most popular methods of franchise financing and comes with several advantages.

 

Benefits and Advantages of Franchisor Financing for Your Business

 

One advantage of using franchisor financing is that you can get everything you need from one place. In addition, many of these programs provide funding for the equipment and other resources you need to launch the company in addition to the franchise fees.

 

You probably won’t need to hunt very far for financing if you’re working with a franchisor with its own finance program. After all, a franchisor is the one who knows the industry the best. These franchisors are more familiar with the risks you are taking and the company’s workings than any other lender. Having an asset like this in your corner can give you a leg up on competition. 

 

Although each franchisor’s financing arrangement will be different, some offer to assume up to 75% of the debt incurred by the new franchisee. As the business starts, agreements may call for deferred payments or repayment on a sliding scale.

 

Before you sign, have your franchise agreement and finance agreement reviewed by an independent company attorney or accountant to ensure that you understand all of the provisions.

 

Securing Alternative Financing for a Franchise Loan 

 

Consider asking for franchise finance from an alternative lender if you require urgent funding for your franchise or wish to get additional capital to augment your commercial or SBA loan.

 

In contrast to conventional lenders like banks, internet lenders are frequently referred to as “alternative” lenders.

 

Compared to their more conventional equivalents, alternative loan products are typically more expensive, have shorter repayment terms, and offer smaller loan amounts.

 

However, it can be worthwhile if you need to augment your current finances, aren’t eligible for a bank loan or SBA loan, or need money right now to take advantage of an unbelievable opportunity.

 

If you’re starting a franchise for the first time, you might have problems securing one of these previously mentioned loans. Most lenders want a certain amount of annual revenue ($50,000 or more, not uncommon) and a certain number of months in operation. 

 

This requirement means that a startup frequently cannot obtain this kind of financing. Instead, after your franchise is established and you want to expand your current firm or buy more sites, it can be useful.

 

Advantages of Alternative Financing as a Business Loan for a Franchise 

 

An alternative financing option might be right as a business loan for a franchise for some borrowers. Unlike conventional funding options, alternative lenders typically offer fewer burdensome requirements and quicker turnaround times. In addition, they provide a range of loan choices, including term loans, commercial lines of credit, and equipment finance.

This level of flexibility includes fewer restrictions on how you use your funding. For example, businesses looking for a smaller franchise loan or in a “high risk” industry may succeed with lending from these institutions.

 

Simply complete a fast and easy online application for many alternative lenders. Then, financing directly can be a straightforward process. In addition, underwriting procedures can be a relief from the usual credit unions and banks.

 

There will still be requirements showing some form of creditworthiness. However, you can often receive funding quickly and often for lesser sums. Even those businesses that do not yet have documentation from years of revenue can obtain lending against future receivables. 

 

Instead of borrowing money from investors or depositors, private lenders provide loans using their own cash.

 

Marketplace Lenders: Without using a bank, marketplace lenders connect investors and borrowers directly through technological platforms. A franchise loan is possible in many more forms than in years past. 

 

Getting a Friends and Family Loan

 

Many prospective franchise owners are considering a friends and family loan for the franchise business. In fact, more than 41% of Americans have loaned money to a friend or family member. 

 

You should treat franchise loans from family members like you would a conventional lending scneario—plan on make all of your payments on time. Despite family being lenient and understanding, it’s best to maintain the highest professional standard. 

 

Make sure to record everything. You should put the conditions you have agreed to in writing. A written agreement should nevertheless be handled carefully. Include the amount you’re borrowing, the due date, and any applicable interest rates.

 

Outlining the franchise loan terms in writing can help you create a strategy for just requesting what you actually need. Based on your investigation and computations, you ought to have the necessary cash figured out. Do not allow yourself to borrow more than that.

 

However, you and your patron must exercise caution because gifts may become costly if they exceed IRS gift tax thresholds. For 2018, 2019, 2020 and 2021, the annual exclusion is $15,000. For 2022, the annual exclusion is $16,000 without incurring gift tax.

 

Benefits and Considerations of a Friends and Family Loan

 

As a result, borrowing money from friends and family typically has a lower interest rate. This process lowers your overall debt level, which can help your organization’s long-term credit, and frees up more of your hard-earned cash for further investment in the company.

 

Another benefit is that a family may be flexible on a practical level. For example, in comparison to banks, they might even accept fewer guarantees or give franchise loans without any.

 

A relative who lends you money may not charge you any interest or, at the very least, may be willing to accept a lower, fairer rate.

 

They might agree to a lower rate of return or a longer repayment time than authorized lenders. They might also strive for a lower initial return rate than commercial sponsors.

 

Your family and friends know you and, ideally, have faith in you. So even if your business idea doesn’t meet all of the standard marketable criteria that banks want, your relationship may make it simpler for you to obtain funding.

 

You might also be able to negotiate better conditions with a friend or relative, given that people have much more freedom in handling investments and franchise loans than other lenders.

 

You might receive money, for instance, with a five-year repayment schedule. Alternately, you might take out a franchise loan with the understanding that you and the lender would discuss payments in a year and that the terms will then depend on how well the business is doing. Another option is to provide a friend’s skills in exchange for them helping you with the initial fees of your business.

 

Free advertising and support are additional valuable benefits. Even if they don’t become partners, relatives and friends who invest in your company tend to remain invested in its success. This translates to free word-of-mouth advertising, online sharing, and other forms of support—things you most definitely won’t get from many conventional loan sources.

 

You already know who you are and your situation, so you probably don’t need a comprehensive business plan.

 

Conclusion

 

Before getting started, you should think carefully to ensure that buying a franchise is your best business decision. Like any opportunity, there are both pros and cons to franchising. Industry, location, costs, and ongoing fees are all part of the considerations for a franchise.

After submitting a franchise loan application, the process of waiting for approval begins. Again, embrace ownership experience and ensure you cover all of your bases in the closing process.

 

Your lender will begin the closing procedure when your franchise loan has been accepted, which includes obtaining collateral, putting together the franchise loan documentation, and satisfying any other authorization needs. 

Go online now to Small Business Bank and work with a team of professionals who understand you—connecting with finance professionals who can help you optimize your experience with lending.

 

Make success a reality with Small Business Bank. You will be glad to connect with a team that has finance professionals standing by to help.

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