Franchise financing can be difficult to obtain. Some franchisers offer financing. For example, a franchisee may defer a portion of the upfront fees, and allow you to finance part of them. Interest rates can be high compared to other options and you may not have to offer up collateral.
Commercial banks can be a good source of funding for many franchises. The single most important issue in landing bank financing is your credit rating. Typically, you will be required to complete a loan package, including: personal financial statements, copies of personal tax returns, and verification of the source of your down payment. This process can take weeks so you have to be patient. Your choice of franchise is an important to the loan decision as most banks favor franchises with brand names and long track records of consistent cash flow. Franchises with few locations are less attractive, as they lack a proven track record of success.
Even if you have good credit, you will most likely be asked to put your own money into the deal, typically about 20% of the amount needed, as well as, equity in your home or other asset(s). Even if the franchise is rock solid, most bank loans to new franchisees occur when a borrower has established relationships with a banker, or has previous experience, or is well known in the community. If you don’t meet these criteria, consider an SBA loan (Small Business Administration).
SBA loans are partially guaranteed by the U.S. government, making them less risky. The standard SBA loan for franchisees is known as the 7(a), which is issued by a bank or other qualified lender, and partly guaranteed against default by the government. Because of that backing, such loans are seen as relatively low-risk.
SBA loans of five- to six-year maturities can provide short-term working capital and equipment. Real-estate loans can run for 20 years or more. Approximately 10% of all SBA loans go to franchisees, with amounts typically running between $250,000 and $500,000, and a maximum of $2 million. Most of the money goes toward franchise entry fees, improvements or working capital. The SBA loans are expected to be repaid out of the franchise businesses cash flow.
Many SBA loans carry fluctuating interest rates. While the actual rate is negotiated between the bank and the borrower, it’s subject to SBA maximums, which are tied to the prime rate. While a low rate may be attractive initially, make sure you can generate enough business to cover the payments if the rate rises.
Another government lending option offered by the federal government is a program offered by the Department of Veterans Affairs. The program, called Patriot Express, because of its fast approval time, makes loans up to $500,000 to active-duty military preparing to transition to civilian life, as well as to spouses and survivors of veterans. The loans come with the SBA’s lowest rates.
If you’re an established franchisee and you are adding or upgrading equipment or vehicles you may want to consider lease financing. Lease financing offers numerous advantages including possible tax benefits, less upfront cash, fixed rate financing, as well as, freeing up credit lines.