3 Ways To Excel in Franchise Financing
Franchising has become a popular way for entrepreneurs to open businesses. Rather than creating a new brand, the franchisor offers a brand identity along with providing operations, marketing, site selection, and other types of support. While evaluating which franchise is right for you, it’s important to understand what types of franchise financing may be available.
Many franchisors offer different types of financing packages. Some franchisors partner with banks or other lenders to finance property purchases or operating expenses while the franchisee launches the business. Others work with leasing companies that can finance equipment or vehicles. Franchisors may also defer franchise fees to help with cash flow management during the company’s first few months.
While commercial banks often offer franchise financing, bankers typically expect a thorough credit application from the business owner. Before applying for a loan, be sure your personal financial statements are up-to-date, prior-year tax returns are filed, and you have access to funds for the down payment to purchase the franchise. You may be required to use your house or other property as collateral for a loan.
The Small Business Administration offers a loan program for purchasing franchises. An SBA loan is funded by a partner bank, with payment guaranteed by the SBA. Borrowers typically need a good credit score and positive credit history. SBA lenders will look to see whether it is reasonable to conclude that the loan will be repaid from the franchise business revenues over the next few years.
Veterans may be able to qualify for a Patriot Express loan. This loan comes with the SBA’s lowest rates and is typically available to active-duty members of the military who are preparing to transition from public service into the private sector.
Franchise financing may also be available through non-bank lenders. The franchisor may work with a financing group or fund that specializes in franchise loans. When lenders work with a franchisor on a regular basis, it’s more likely that lending officers understand the business model and the ability to repay the loan once the franchise is fully operational. Although rates may be higher for non-traditional financing, credit requirements may be less stringent.
Regardless of the franchise financing option you choose, it’s best to have your personal financial reports and credit status in good shape before applying for financing. Early planning and preparation can help make the financing process easier and put your lender in the position to approve your loan and jumpstart your path to business ownership.