What to Look for in Small Business Loan Providers for Franchisees

There are times when you want to expand your business when you see constant success in it. You would want to open your business in new locations to establish your identity there.

This is where you would require small business loans for franchise, where the potential for growth is baked into the business model. But be your business of anything; it requires funding.

In this article, you will learn about small business loans for franchises, how they work, the requirements for them, and their benefits.

Choosing a loan provider for a franchise loan

Searching for the perfect small business loans for franchise scenario begins with comparing small business loan providers. Before deciding which lender to trust with your business, consider the following factors about your franchising goals.

Necessary capital

To determine the total amount of loan you'll want to get approved for, tally up the following costs:

• Franchise fees
• Buildout costs or other real estate expenses
• Training costs
• Equipment
• Inventory
• Licenses and legal fees

Once you have a total loan amount in mind, look for a lender that offers small business loans for franchise for those business needs. Many franchisees choose to work with online lenders.

Personal creditworthiness

A lender will evaluate the creditworthiness based on several factors including:

• Personal credit score
• Business credit history
• Business plan
• Net worth

Sharing the details about your good credit with an online lender before completing an online application may save time finding loan options and throughout the application process. Have a copy of bank statements, tax returns, and financial statements handy to expedite the process further.

Loan application preferences

The loan application process for small business loan to start a franchise varies depending on the lender you work with. Traditional banks and credit unions generally have a longer process that may involve in-person appointments. Alternative lenders on the other hand, may offer an easy online application and access to fast funding.

The best franchise financing options

A small business loan franchise purchase can be exciting but deciding how to finance the new venture takes careful consideration. Franchisees have many options for financing their franchise including in-house financing from the franchise brand, using personal funds, crowdfunding, taking out a loan with a traditional bank, or working with an alternative lender on any of the following financing options.

SBA Loan

SBA loans are a funding option for small businesses. A portion of the loan is guaranteed by the U.S. Small Business Administration. Since most of the funds are backed by the SBA, these loans are lower risk for financial institutions that issue them, making them more accessible than a line of credit or other financing options. Lower interest rates and smaller down payments also make SBA loans a preferred method of small business loans for franchise for those who can get approved.

Several SBA loan programs include the SBA 7(a), 504 loans, and Microloans.

SBA 7(a) loans

The most common of the SBA loan products, the SBA 7(a) loan, can provide up to $5 million in funds. Approval is based on the location of the business, the amount of equity invested, and the borrower's credit history. The funds can be used for:

• Working capital, cash flow needs
• Large purchases including equipment, fixtures, supplies, land, and buildings
• Renovations in a new or existing small business loans for franchise
• Business startups costs
• Refinancing existing business debts, like business credit cards

SBA 504 loans

The SBA 504 loan program partners with certified development companies (CDC) to provide funds up to $5 million. These loans have repayment terms with fixed interest rates and can be used for major fixed assets or most purposes that promote business growth and create jobs.

SBA Microloans

The SBA Microloan program gives borrowers access to funds up to $50,000 to rebuild or reopen existing small businesses. Microloans cannot be used to refinance business debts or buy commercial real estate.

Term Loan

A term loan is a traditional type of small business financing where the borrower receives a lump sum of money upfront. The long-term or short-term loan is repaid according to a predetermined repayment schedule, and each monthly payment comprises principal and interest. The interest rates with term loans can be fixed rates that remain the same over the life of the loan or variable interest rates that fluctuate with the market rate. Most term loans do not have any restrictions on what the funds are used for, but repayment terms vary depending on the lender that issues the funds.

Specialized financing

Some small business loans for franchise may be looking for small business loans to purchase a building or buy machinery. For those needs, there are specific loans, like real estate or equipment financing.

Commercial Real Estate Loan

A commercial real estate (CRE) loan provides the capital for a borrower to purchase land or buildings. The repayment terms of a CRE loan offer fixed or variable interest rates depending on the borrower's eligibility and may require collateral and a down payment or personal guarantee.

Equipment financing

Equipment financing allows a borrower to pay for equipment like vehicles, machinery, kitchen appliances, computers, and software. Since the asset is collateral for the loan, equipment financing may offer lower interest rates and smaller down payments than other financing options.

How to get started with a franchise

Entrepreneurs interested in small business loans for franchise may wonder about the steps required for loan to start a franchise. Before beginning their journey, interested small business owners must decide what brands they want to go into business with.

Small business loans for franchise opportunities are available in many different industries including restaurants, home health care, travel agencies, entertainment, and business services.

Once an entrepreneur has narrowed down an interesting industry, they can list potential brands and begin the due diligence period. Services can help an entrepreneur find the right small business loans for franchise, such as a franchise broker or the SBA franchise directory.

Research initial investment and franchise loan requirements

The initial investment amount and ongoing costs differ depending on the industry and brand in which an entrepreneur decides to invest. Common costs and requirements required to start a franchise include:

• Initial investment (required to use the brand name)
• Franchise fees (initial and ongoing)
• Estimated annual revenue of the small business loans for franchise
• Ongoing commissions or royalties
• Working capital
• Approval requirements (franchisee's net worth, education, experience, etc.)

Review the franchise disclosure statement

A franchise disclosure document (FDD) is a statement provided by the franchisor that provides legal information about purchasing the small business loans for franchise and about fee requirements, litigation reports, patent details, and performance and revenue expectations. The FDD can be accessed by requesting a copy from the franchisor or through an online database. Most franchisors publish an updated FDD annually.

Create the business entity

Once entrepreneurs have a specific franchise in mind, they must decide how they are going to structure their new business legally. A sole proprietorship is an option, although it is a high-risk choice because sole proprietors are not legally separate from the business and can be held liable for any business debt or lawsuit implications. Most franchisees purchase their business as a limited liability company (LLC) or a corporation. Setting up a new LLC is simple and can be done online through sites like Legal Zoom or an attorney.

Write a business plan

A business plan is important to any new small business owner's journey. It discusses information about the financial, marketing, and operational aspects of the new franchise. Entrepreneurs can follow steps to create a franchise business plan, which they can provide to lenders, investors, and other interested parties.

Secure financing

Before proceeding, prospective small business loans for franchise owners should be sure they have the required cash on hand or are able to secure funding. The initial investment and startup costs of opening a new franchised business often require a franchise loan. Determine if you are going to use franchisor financing, a personal investment or home equity loan, a bank loan, or one of the recommended financing options listed below.

Apply to be a franchise

Every franchise opportunity comes with its application process. Some small business loans for franchise applications can be completed through an online application and review of financial situation, while some require a personal appeal or written expression of interest. The franchise may conduct interviews to determine if the potential franchisee is an approved candidate.

Review contracts and franchise agreements

There is a significant amount of paperwork required when purchasing a franchise. A contract will need to be signed by both parties and will list the details surrounding:

• Type of small business loans for franchise
• The term of the contract (5-20 years)
• Funding options
• Location/territory
• Trademarks, patents, signs
• Support and training
• Fee schedule
• Advertising policies
• Dispute resolution
• Quality control procedures

Secure a location and staff

The franchisor provides guidance about location requirements, signs, store designs, fixtures, and even decorations, but ultimately, the franchisee is responsible for finding the right space to lease or buy. Once the location is set, consider hiring a few key employees. Additional staff can be added at any time, but getting a jump start on training employees will save time.

Conclusion

Considering purchasing small business loans for franchise is a big step. Finding the right lender is an important part of ensuring a smooth process. Choosing a lender with positive reviews for customer service and offers the type of loan you're interested in is crucial.

FAQs about small business loans for franchise

What is an ideal loan for a franchise?

Small Business Administration (SBA) loans are good small business loans for franchise options. SBA loans generally have a requirement for lower down payment and longer repayment terms. This type of situation is beneficial as per your current net worth.

Can you get an SBA loan for a franchise?

The SBA 7(a) loan is one of the most popular small business loans for franchise owners. This flexible financing option can be used for various business needs, including purchasing a franchise, covering startup costs, acquiring equipment, and securing working capital. With favorable terms and broad eligibility, SBA 7(a) loans provide a reliable funding solution to help entrepreneurs establish and grow their franchise businesses.

How to get approved for a franchise loan?

Securing small business loans for franchise ownership involves several key steps, regardless of whether the funding comes from the franchisor, the SBA, or another lender. Franchisees typically start by consulting the franchisor to explore financing options and support. Next, they verify SBA loan eligibility and assess available collateral to strengthen their application. Lenders will also review the applicant’s credit history and require a down payment. Additionally, preparing a solid business plan and providing detailed information about the franchise are crucial steps in demonstrating the viability of the investment and increasing the chances of loan approval. However, the requirements and eligibility will vary.

How difficult is it to get an SBA loan to buy a business?

Sometimes, getting an SBA small business loan may seem hard when it's time to borrow the same. This is because the lenders ask the borrowers to demonstrate a healthy cash flow, which can show that their business is operating healthily. It is also done to ensure the borrower pays their existing debt on time to get small business loans for franchise.

Can you get a business grant for a franchise?

The U.S. government offers numerous programs to support and promote small business growth. Small business loans for franchise opportunities, along with government-backed grants, can provide essential funding for aspiring franchise owners to launch and expand their businesses. These financial resources help secure the capital needed to cover startup costs, operational expenses, and other critical investments, making franchise ownership more accessible and sustainable.

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