Opening a franchise business is a common dream for aspiring small business owners. You have the chance to run a new business with a trusted name and brand backing you up. Although you get to hit the ground running with the brand’s existing reputation, as with any new business, the initial costs are nothing to fear. To succeed at their new business, franchisees will need to have a steady cash flow and franchise financing options to ride the waves of the initial economic storm.
Do I Qualify for Franchise Financing?
Qualifying for franchise financing often varies based on the form of funding you choose. For example, traditional bank loan requirements will not be the same as the requirements from alternative or online lenders. Although this is the case, some conditions remain the same regardless of the application process.
Here are a few general requirements to keep in mind when thinking about your qualifications for franchise financing:
- Business Experience: How much business experience do you have?
- Credit Score/Credit History: Is your personal credit score 750 or higher? If not, can you improve it?
- Bank Statements: Can you afford your loan, and will you be able to pay it back?
- Personal/ Business Tax Returns: What’s the state of your personal/business finances?
- Business Plan: How do you plan to make money with your franchise?
- Franchise Brand: What kind of reputation does the brand have? Are they prone to closures?
- Proof of Collateral: Do you have any fixed assets that you can use to secure your loan?
5 Ways to Get Financing for Franchisees
A franchise loan is a financing option that many new franchisees choose to take. If you find yourself needing to secure a franchise loan to dive into the industry, we’ve taken the liberty of simplifying the process for you. Startup costs can multiply quickly, and franchise loans ensure that you can keep up. Here are five ways that hopeful franchisees can get financing for their businesses.
Before you head out looking for a franchise loan, why not seek franchise funding internally first? Your franchisor may offer internal franchise funding to start your business. These funding programs are tailored to the brand’s needs, which means that one singular lender meets all your needs. Several of these programs offer funding needs beyond the franchise fee, but they also provide other funding for equipment materials.
However, just because a franchisor offers you funding doesn’t mean that it’s always the best route for a franchisee. Compare their financing with other funding options to ensure that you’re making the right decision.
Commercial Bank Loans
Traditional term loans from commercial banks have been helping franchisees launch their small businesses for years. Most people are familiar with this option, as it’s similar to loans they may have received in the past, such as school loans or a home mortgage. In this financing option, a commercial bank will offer you a sum of money upfront, and you’ll be responsible for paying it back in monthly installments, with interest, over a set time confidently.
If you choose to go with a term loan, the bank will want to see proof that you’re financially capable of paying back your loan. They will ask to see your business model, check to see if you have good credit, and look over your financial history. The better your credit score and economic history are, the higher your chances are of receiving a loan as a new franchisee.
SBA loans are often one of the most desirable financing options for new franchisees. Since the Small Business Administration backs these loans, it lessens the risks for banks, making it easier for small business owners to apply. Although these loans are similar to traditional loans from banks, the three primary SBA loans permit a borrower to borrow money for various purposes. Two standard SBA loans are the SBA 7(a) and the SBA 504/CDC loan.
With their low-interest rates and extended repayment terms, they take some of the pressure off of new franchisees. However, keep in mind that these excellent terms make it harder to qualify. The requirements for SBA loans are strict, and the process is lengthy. You also need to check and ensure that your franchise is on the Franchise Directory of the SBA. If not, your franchisor will need to submit their franchise disclosure document to the SBA for approval. If they refuse, you’ll need to consider another option to secure your franchise loan.
Loans From Family and Friends
Although it may get a bit dicey, borrowing from family and friends is a common way to finance a new franchise. Some franchisees choose to obtain small business loans through a family partner, ask for money outright, or receive a family gift payment.
If you choose to go this route, be sure to get the loan terms down in writing. You may think that a contract is unnecessary for your family, but they help protect both the borrower and lender. List the term loan and repayment terms in this contract, as well as any other stipulations. The last thing you want is family arguments down the line if things don’t go as planned.
Alternative lenders are a form of franchise financing that appeals to franchisees who have a short track record or simply don’t have the time to apply for a traditional loan or SBA loan.
These lenders have more flexible requirements and faster approval times than other financing options. They offer various loan options like Peer-to-Peer Lending, equipment financing, lines of credit, invoice financing, and more. If you’re a franchisee who dreads the traditional process of acquiring loans, alternative lending may be right for you.
What Do I Need to Apply for Franchise Loans?
When applying for a franchise loan, lenders will want to get a clear picture of the franchisee’s financial profile. Be prepared to show them items such as your credit score, current net worth, and liquidity. Generally, franchisees with good credit scores above 750, higher net worth, and liquidity find it’s easier to qualify for a franchise loan, but each person’s case is different.
Each commercial bank requires applicants to provide unique documentation, but the general requirements for a franchise loan are the same. Banks will want to see your financial information, proof of income, bank statements, and identification. They may also ask to see a business plan to provide details on how you plan to run your franchise and what you will do to bring in business.
How Can I Improve My Chances of Being Approved For Franchise Financing?
When lenders consider franchisees as applicants, they look at how much risk you represent. If your current financial situation has decreased your chances of being approved for franchise funding, all hope is not lost.
Some franchisees who need to improve their chances of franchise funding choose to bring in a strong business partner. It can be a friend of a relative who has a good credit score, has been a small business owner, or has high net worth and liquidity. If you’re a younger franchisee looking to dip your feet into the franchising world, a solid partner can make up for your lack of financial history.
Other franchisees choose to get involved with the brand they are looking to franchise before turning in their loan application. Lenders are looking for potential franchisees to have relevant experience in the field, and this can give you a higher chance of qualifying for your franchise loan.
Securing a franchise loan is just another rung on the ladder to succeeding at your new business. To make this step a smooth one, performing your due diligence with your finances and securing a good business partner are crucial. Once you have a clear idea of what you stand to bring to the table, you can confidently seek out lenders.