What Is Franchise Financing?
Franchise loans help franchisees get the money they need to be able to cover necessary start-up costs like franchise fees, getting a location, and buying equipment and inventory.
Pros and Cons of Franchise Financing
While many types of new businesses, particularly startups, can have a hard time getting business loans, lenders can be a little more flexible when it comes to giving loans being used for franchises. Since franchises have a lower risk of failure, some lenders can be more flexible about approving loans being used for them.
Your odds of getting a loan for your franchise largely depends on the quality of the franchise. Loans for larger, well-known franchises are more likely to be approved while smaller, newer ones may be more difficult. However, large franchises with national or international name recognition are extremely expensive to get involved with.
Many types of franchise loans require collateral, but in many cases, things like your franchise’s location and equipment can help fulfill that need. However, there are some circumstances where a lender could ask an applicant to provide additional collateral.
Although lenders may be more willing to approve a loan for a franchise, that doesn’t necessarily mean franchise loans are easy to get. Many lenders put a lot of emphasis on an applicant’s credit score. In many cases, lenders won’t approve a loan to someone with a credit score below 650. Even if you have good credit, you’ll also need to be able to make a sizeable down payment. Most lenders will expect you to make a down payment of at least 20%.
Types of Franchise Financing
A regular business loan is one way to get financing for a franchise. Applying for a business loan can be time consuming, but since franchises have a lower risk of failure, banks are often more inclined to approve loans that are being used for a franchise.
Some types of SBA loans can be used to buy a franchise. Many different franchises are approved by the Small Business Administration as being eligible for 7(a) loans. Funds from a 7(a) loan can be used for a wide variety of business purposes, including franchise fees, purchasing equipment and inventory, and hiring employees. For larger purchases like real estate or particularly expensive pieces of equipment, a CDC/504 loan is another option to consider.
Applying for Franchise Financing
Each franchise is a little bit different. Some franchises let their franchisees seek loans on their own, but many franchises have established relationships with lenders or directly offer financing options to their franchisees. If the franchise you’re working with is able to recommend a lender to you, their existing relationship may improve your chances of being approved or help you get better terms on your loan.
Since traditional business loans can be used for franchises, lenders will want to see much of the same information as you would if you were seeking a loan for a business you started completely on your own. Be ready to show things such as:
- Your business plan
- Copies of your personal financial records and tax returns
- Your resume, as well as resumes for any partners you may have
Before you officially agreed to become a franchisee, you should have been given a Franchise Disclosure Document (FDD) that includes detailed information about your chosen franchise’s performance history. Lenders will absolutely want to see this.
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