Best Financing Options for Starting a Franchise

Disclaimer: Information in the term loan articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the term loan articles often covers financial products that Biz2Credit does not currently offer.

Owning a franchise combines the flexibility and independence of being a small business owner with the backing, support, and infrastructure of a large corporation. However, paying for a franchise can be expensive. Entrepreneurs interested in purchasing a franchise who are short on working capital shouldn’t be discouraged by the high price tag. This guide explains how to get a franchise loan to turn the dream of owning a franchise into reality.

The Basics of Franchise Financing

Franchise financing allows first-time or serial franchisees, whether investing in a new or existing franchise, to pay upfront franchise fees and other business startup costs. In most cases, lenders require some personal funds to be put up before they provide financing, usually 10 to 30% of the total investment.

Best Franchise Financing Options

Franchisees have many funding options available to them, but the question of how to get a franchise loan can seem daunting. They may access one or several of these financing programs to pay for their new business. Here are some of the best loans for franchise business operators.

Franchisor Financing

Many franchisors offer loans to start a franchise or through preferred lenders who administer the loans. It’s a common and beneficial way to finance a franchise.

One benefit of franchisor financing is that all your cash and business needs can come from a single source. Many programs offer loans not only to cover franchise fees but also to buy equipment, real estate, and the other things you need to operate the business.

Each type of franchise financing and the agreements between the franchisee and franchisor will vary. Agreements may include deferred payments during the business startup phase or they structure repayments on a sliding scale.

Even if your franchise company offers financing, it’s worth shopping around. This type of funding may not always come with the lowest interest rates or most favorable terms.

Commercial bank loans

Franchisees can apply for a small business loan from a bank, credit union, or other traditional lender. It comes in the form of a term loan, which provides a lump sum of cash that you pay back with interest monthly over time. It’s what most people think of when it comes to loan financing. It is similar to a student loan or home mortgage.

The franchisee must have a good credit history, an overall positive financial situation, business experience, tax returns, and submit a detailed business plan to qualify for a bank loan. The lender will use this information to assess creditworthiness.

Small Business Association (SBA) loans

Of all the loan options on how to get a franchise loan, one of the most attractive options for franchisees is SBA loans, which are partially backed by the U.S. Small Business Administration and funded by intermediaries affiliated with the SBA.

SBA loans are similar to traditional term loans from a bank or alternative lender. However, the SBA reduces the risk to lenders by guaranteeing a portion of the loan amount. The guarantee incentivizes lenders to offer more loans to small business owners with lower interest rates and longer repayment terms than they usually would.

Be aware that the qualification standards for SBA loans can be stringent. The application process is cumbersome and can take many months to complete. Because of the time it takes to be approved for an SBA loan, it’s wise to consider your chances of being approved before you apply. You could lose out on your opportunity to purchase a franchise if you go through the several-month application cycle only to find out you don’t qualify.

Also, carefully consider which SNA loans are suitable for your situation. The SBA 7(a) loan program is ideal for new franchises, compared to SBA 504 loans, which have significant limitations.

Alternative and online lenders

If you need money to purchase and fund other aspects of your franchise quickly or want to secure additional capital to supplement a traditional bank or SBA loan, consider applying for franchise lending through an online or alternative lender.

Typically, online lenders have simpler application processes and less-stringent requirements than traditional financing options. Applications can be approved and funding completed in one or two business days.

Be aware that the less stringent approval requirements, convenience, and fast access to cash could end up costing you. Alternative loan products tend to come with higher interest rates and fees and shorter repayment terms than those from traditional counterparts.

Alternative lenders offer a wide range of lending options, including short-term loans, long-term loans, equipment financing, business lines of credit, and more.

Personal assets

One less favorable option of how to get a franchise loan is with your own money from savings accounts, severance packages, home equity, and retirement plans. However, using personal assets can jeopardize your future financial security.

How To Secure a Small Business Franchise Loan

After you determine the type of loan that’s right for you, here are the steps to take to get approved.

• Talk to your franchisor. Franchise companies may offer financing or have a list of approved lenders who can work with their franchisees.
• Figure out your collateral. Franchise owners must guarantee their loans with assets of value that can be sold quickly, such as cash, equipment, property, stocks, and vehicles. Your lender can seize these assets if you miss your monthly loan payments.
• Find out your personal credit score. Running a credit report allows you to correct any inaccuracies or improve your score if it’s too low to qualify for financing.
• Come up with the down payment. Franchise lenders typically expect franchise owners to put approximately 20 percent of the franchise value down before approving funding.
• Write a business plan. Banks and SBA lenders usually require a detailed franchise agreement plan with revenue and expense estimates and cash flow projections.
• Share information about the franchise. Lenders are more inclined to work with well-known franchise brands with a history of success rather than sketchy ones.
• Apply with several lenders. In addition to increasing the likelihood of getting approved, submitting loan applications with several lenders allows you to compare competitive interest rates and repayment terms to get the best deal.

Final Thoughts

Becoming a franchise owner is a great way to achieve your entrepreneurial ambitions. You get to be a business owner while enjoying the safety net of a large corporation backing you. While the price of entry for most franchises is high, securing the right franchise financing could make your dream a reality.

FAQs on How to Get a Franchise Loan

How hard is it to get a franchise loan?

Lenders will look for strong credit, sufficient collateral, valid financial statements and a solid business model before approving the loan.

How much can I borrow for a franchise?

You can typically borrow between $50,000 to $5 million, depending on the franchise type, your creditworthiness, and the lender. Some lenders won’t allow you to borrow the full amount needed to ensure you personally invest in the business.

How do you get money to open a franchise?

You can get funding through a myriad of options, including: franchise loans, Small Business Administration (SBA) loans, partnerships, home equity loans, or using a Rollover for Business Startups (ROBS) plan.

Can I get an SBA loan to start a franchise?

Yes, you can get a SBA loan to start a franchise.

How can you use a franchise business loan?

A franchise business loan can be used to cover various startup costs and working capital needs.

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