Franchise agreements require franchisees to pay certain costs, like advertising fees, a franchise fee, and royalties. While such costs might seem daunting, financing for franchises is available through commercial lenders, franchise financing companies, and the U.S. Small Business Administration (SBA). Some franchisors also offer special arrangements, such as waiving franchising fees for a specific period, to help fledgling franchisees get started.
How Much Can I Borrow for a Franchise?
The loan limits of commercial loans can vary by lender. Loans backed by the SBA must follow SBA guidelines. For example, SBA’s popular 7(a) loans offer funding up to $5 million. SBA Express loans provide funding up to $350,000, while SBA Export Express loans max out at $500,000.
Where To Get a Loan for a Franchise
Finding financing for your new venture can be a headache. However, funding options exist, specifically designed for franchisees.
The Franchisor
Some franchisors will help new franchisees start their business by financing a portion of the franchising fee. The franchisors can also partner with lenders such as commercial banks to help new franchisees raise capital to start their business. If a company agrees to fund its new business partners, it usually indicates this on its official website and on chapter 10 of its franchise disclosure document or agreement.
Franchise Financing Company
Several companies specialize in funding new franchisees. These companies usually match the borrowers with the perfect lenders for their financial need. They may also lend directly to new businesses.
Business Loans From Banks or Credit Unions
You can arrange to borrow from commercial banks or credit unions, such as Bank of America. As with other types of loans, the lender must review your net worth and credit history to determine your creditworthiness. In some cases, you may also have to provide collateral to secure your business loan.
SBA Loans
Through participating lenders, the SBA offers loans up to $5 million. The most common type of loan made to new businesses is the 7(a) loan. The 7(a) loan program offers funding for equipment, inventory, working capital, or to buy real estate. 7(a) loans offer interest rates between 2.25% and 4.75%, depending on the loan amount and maturity period.
How To Qualify for a Franchise Loan
Before buying a franchise, develop a strategy that will enable you to access financing. Here are a few tips that can help you qualify for a loan.
Determine the Collateral Required
Collateral requirements for loans offered by commercial lenders may vary by lender. SBA 7(a) loans do not require collateral for loans less than $25,000. For loans over $25,000, the lender must follow the collateral guidelines they’ve established for non-SBA business loans. For collateralized SBA loans, the lender must take a first lien on the assets they finance and then on the borrower’s fixed assets, such as real estate. However, if the borrower’s real estate equity is below 25%, the lender doesn’t have to take a lien.
Check Whether Your Target Franchise Is SBA Approved
Choose a franchise already registered and approved by the SBA. Once a franchise obtains SBA registration, individual franchisees typically do not need to seek additional SBA approval. This makes a difference because it simplifies the loan application process. Loan applications from franchises that already exist in the SBA registry typically receive faster approval because the SBA already has the required information for an evaluation.
Borrowing for a B2B Company
If you own a business-to-business (B2B) franchise, you can use your clients’ invoices to obtain financing from lenders. You can obtain cash advances using your clients’ invoices, a practice called “factoring.” The factor company takes the role of collecting the full amount owed to you by your client, then deducts the amount advanced to you, and any other fees, finally paying you the balance.
Lenders That Pay Your Suppliers
Instead of getting a general loan, you can ask your lender for financing that pays your suppliers first, rather than just giving you a lump sum of money to use for any purpose. This type of financing is known as “purchase order financing” and it enables you to fulfill orders while growing your business.
Bank on a Good Reputation
Buying a franchise from a highly reputable business might improve your ability to get financing. Many lenders have short-listed franchise businesses that have good repayment histories. You can also ask your franchisor to introduce you to lenders that are likely to accept your loan application.
Franchisors Who Facilitate Lending
Some franchisors help their franchisees with access to loans, typically in one of two ways. The franchisor may have a department that guides the franchisees through the loan process, or it may have partnered with loan brokers who will help franchisees access funding.
