Opening a franchise can be an exciting way to own your own business, but it also requires a significant upfront investment. Franchise financing allows entrepreneurs to fund the startup costs of a new franchise location through loans tailored to this type of business.
One option many prospective franchisees consider is a franchise line of credit, which provides access to capital on an as-needed basis. In this comprehensive guide, we’ll explore popular franchise financing options, what it takes to qualify, how to apply for funding, and tips for comparing lending products to find the best franchise line of credit for your business.
Before applying for a loan, it’s important to understand the types of financing available to franchise buyers. Common options include:
Banks offer term loans or lines of credit that can fund 80-90% of startup costs. Approval requires good credit, collateral, and for established banks to lend to proven franchise models.
The two most popular Small Business Administration loan programs for franchises are the SBA 7(a) loan which offers up to $5 million for most business purposes, and the SBA CDC/504 loan for major assets like real estate. These government-guaranteed loans make lending franchise applicants less risky.
Online alternative lenders provide faster, more accessible business financing. But typically at higher rates and shorter repayment terms than SBA loans. Useful to bridge gaps banks can’t fill.
Some franchisors themselves help new franchisees obtain lending to make buying a location more affordable. This can include preferred lending partnerships, incentives like discounted fees, or direct lending programs.
Additional options like 401(k) business financing, securities-backed lines of credit, equipment financing, and hard money loans may provide capital if the above products are unavailable. However, these tend to be more costly forms of financing.
Meeting eligibility requirements is key to securing loans for your franchise purchase, including:
Franchise financing can take 30-90 days to secure. Here are steps loan applicants should take:
See if they offer direct lending programs or relationships with banks active in SBA lending. If not, they can refer experienced lenders.
Not all franchises meet the SBA’s requirements. Consult their Franchise Registry or ask lenders about a franchise’s eligibility.
Consider banks you already have accounts with first. Weigh factors like experience with franchise lending, application requirements, customer service, rates and terms.
That includes personal financial statements and tax returns, resumes, franchise agreements, projections and a business plan.
Be ready to promptly provide follow-up documents. Lenders will review and verify application details in depth prior to any approval.
It takes 1-3 weeks to get SBA loan approval and several more to fund and finalize the loan agreement. Stay engaged in the process with your lender until completed.
With all financing, it is smart to compare multiple lenders to find the best rates/terms. Consider the following when evaluating franchise line of credit providers:
Opening a franchise with financing allows entrepreneurs to launch or expand without large pools of personal capital. An informed borrowing strategy is best, so do your due diligence, start applying early, and consult professionals like accountants, lawyers, or financial advisors with franchise expertise whenever you have questions. While the franchise loan process involves rigor, coming fully prepared will set your new business up for success.
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