After months of researching your options, you have finally chosen a franchise you wish to purchase. Now you are ready to start looking at franchise loans that will give you the best terms and rates and you’ve just discovered that this isn’t as easy as you initially hoped. Here are a few things you need to know to help get you on the right track.
Always start with a business plan
Even though you are purchasing a franchise with instant name recognition and established systems and procedures you will need to consider it like any new business and that means constructing a solid business plan. The Federal Trade Commission explains the disclosure document that franchisors are required to provide so that you can fully evaluate the franchise opportunity. When constructing a business plan, don’t forget to include initial franchise fees and other expenses, continuing royalty payments and advertising fees. Considering that this is a new venture, lenders will want to see a carefully considered business plan with projected earnings.
Franchise loans from commercial banks
Commercial banks are familiar with the franchising system so they are often the first place a small business owner will turn to for funding. The most important factor a bank will consider is your credit rating. You will need to present a personal financial statement, copies of personal tax returns for 3 years and you must be prepared to verify the source of your down payment. Most banks will ask for collateral to secure the loan and this will include a home mortgage or even a 401k and the bank will expect you to put down 20% of your own money. On top of all of this, banks favor those who already have established relationships with their banker, have previous franchise experience or are considered a figure in the community.
Small Business Association loan for franchisees
These are known as 7 (a) loans and are partially guaranteed by the government which makes them less risky for a lender. These loans are normally issued through traditional lenders and run between $250,000 and 2 million. The money is mainly used for entry fees, improvements and working capital. Small business owners are still required to have good credit, must contribute some of their own money and are expected to repay the loan out of income generated by the franchise.
Franchisor offered financing programs
Many franchisors now offer financing programs for startup franchise owners. These may include limited term zero-percent financing, lower fees, reduced royalties and minority stake ownership. Each program is different depending on the franchisor. The SBA recommends that new franchise owners always do their due diligence when looking at this option to fully understand what it will cost you in the long run.
Alternative lending sources
There are many options available for startup franchisees or franchisers looking to expand through alternative lending sources. Microloans, loans of up to $50,000 may be an option if your startup costs fall within that ballpark. Otherwise, non-traditional lenders offer many different financing options with varying loan amounts, terms and conditions. They will look at the whole picture, not just your credit score by taking into consideration your experience in the industry, the franchise you wish to purchase, your finance history and your assets.
Fundkite specialize in franchise financing and stay up to date with the changing landscape of loan options. Apply now to find out what choices are available for you to get started today.