The Best SBA Options for a Franchise Loan

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So many of the restaurants and stores we depend on are franchises, whether you realize it or not. Think about your favorite fast-food restaurant or pet store. If it’s a chain, then there’s a good chance it’s a franchise. This means that each location might be owned by someone else, but they all operate under the same brand. Many national chains have found success operating as franchises, with individuals owning one or multiple locations.

A lot of business owners decide to go the franchising route because it gives them the flexibility of owning their own business, with the security of an established brand behind them. As with any business, however, costs can be high at the beginning or if you encounter hard times. Franchises often have to pay an initial investment, including a franchise fee and any startup costs, like initial inventory, signage, supplies, equipment, and a grand opening party.

For this reason, owners often need funding options to acquire the right business financing to start their new franchise and succeed. Thankfully, franchises have many financing options available to them, including Small Business Association (SBA) loans, short-term loans from online lenders, equipment loans, and other franchise financing options.

Franchise Financing Benefits

Franchise owners should be excited about all of the funding options available to them. Traditionally they have an easier time securing a traditional loan from the bank than other small business owners, probably because they are backed by a successful brand. Securing the right financing will still take some hard work since bank and SBA loans require an application and approval process. There may also be a minimum credit score for some types of financing.

Alternative funding routes are often a great way to get the financing you need, especially for those with a low credit score, because they offer fast cash and varying forms of repayment. Discover which financing option is best for your franchise by reading more below.

What You Should Know About Franchise Loans

Before you even consider the different types of franchise financing options, there are some valuable pieces of information to know and actions to take. Just because you are purchasing a franchise does not mean you will be financially stable, at least right away. Putting away some cash is essential, as is making a thorough business plan to follow. If your credit history is good and you have an excellent credit score, more financing and loan choices will be available to you.

Before you sign the franchise disclosure document and secure a loan, here are a few things to consider:

  • Know your net worth.
  • Make a thorough business plan to follow.
  • Reserve some cash in case of emergency.
  • Understand that a loan from the financer isn’t always best.
  • Research the different types of franchise loans available.

Below we will dive into this subject and discuss what you should know about financing for your franchise.

Know Your Net Worth

Before you even think about securing franchise financing, you will need to know your net worth. List out all of your fixed assets and liabilities. Potential lenders will want to see your credit history and how well you’ve paid off loans in the past. It doesn’t matter how much money you make, but rather how well you have budgeted and cared for your finances. Online lenders and traditional banks will all want to learn about your credit history and most likely will check your credit score.

Assets can include:

  • Savings accounts
  • Checking accounts
  • Real estate
  • Automobiles
  • Insurance cash values
  • Bonds
  • Stocks

Liabilities can include:

  • Home mortgage
  • Car loans
  • Student loans
  • Current monthly bills
  • Company loans
  • Hospital debts
  • Credit card debt

Create a Business Plan

Every business owner needs a solid business plan when they’re seeking financing from lenders, especially those that own franchises. You’ll need to demonstrate what you plan to do with your working capital and how you will turn a profit if you secure a loan. Not only will a thorough business plan help you secure financing, but it may also help you find lower interest rates or a much sought-after SBA franchise loan.

Reserve Some Cash

It’s essential to have some cash saved when you open a franchise or small business. Sure, there are plenty of franchise financing options available, but you may still need additional funds. Opening a franchise is a risk, even if you have a strong franchise brand behind you. Try not to invest more than 75% of the cash you have on hand. It’s also best practice to avoid pulling money from special accounts, like retirement or college savings accounts.

Avoid Loans From the Franchisor

In some cases, franchisors can lend funds. They are usually excited to fund a new location and turn a profit, but may not offer the best interest rate or repayment terms. Make sure you get all of the details from the franchisor before deciding on franchise financing. Just because an existing franchise offers you a financing option doesn’t mean you have to take it. There are plenty of alternative financing options available, including the traditional bank and online lenders.

Research Small Business Loans for Franchises

Franchise financing comes in many shapes and forms. It’s crucial to research small business loans, lines of credit, and other funding options from business lenders. Before you commit to one type of franchise financing, determine what kind of cash flow you need and what eligibility requirements there are. Narrowing down your choices will help you make the best decision.

Best SBA Loan Options for Franchises

Benefits of SBA Loans

There are many benefits of using SBA loan programs for franchises. They offer small business owners the opportunity for funding with low fees, long-term durations, and prime rates. When durations of repayment exceed two years, a franchise can acquire more capital thanks to affordable monthly payments. Many franchisees choose to use SBA loans for real estate or expansion projects, and funding any long-term projects you may have.

SBA Loans to Consider

There are two key SBA loan programs for franchises to consider: the SBA 7(a) loans and the 504 program. These loans are unique because they are backed by the U.S. government. To be eligible for their franchise financing, your franchise must be listed in the SBA’s Franchise Directory. If you are having trouble finding the right funding for your franchise from other financial institutions, it’s worth looking into these two loan types.

7(a) Loan

If you are opening a new franchise, the SBA 7(a) loan is the best option. It can also be used for existing franchises that need to refinance, gain working capital, or expand. The 7(a) loan can be based on future projections, which can be rare to find among traditional lenders. Down payments are typically lower, and the repayment term is up to ten years. The maximum amount for a 7(a) loan is $5 million, and the interest rates are excellent. If you are a veteran, you might also be eligible for reduced fees thanks to the Veterans Advantage Program.

The one disadvantage to the 7(a) loan is that the lenders will tie up your personal real estate as collateral, meaning you cannot sell your existing home or buy a new one while you are using this loan.

504 Loan

The 504 loan program is another option that could be ideal for franchises. It can be used to fund commercial real estate, facilities, and equipment. It’s not the best option for financing new franchises because there are limitations on what the funds can be used for. But, if you’d like to expand your franchise or buy new equipment, the 504 might be the right choice for you.

Other Franchise Loan Options for Small Businesses

Small business loans, lines of credit, and business credit cards are just a few of the other options available to franchisees in need of financing. Bank loans may be hard to secure for some people. If your credit score is poor or you’re having trouble finding funding from traditional lenders and financial institutions, there are plenty of alternative ways to find franchise financing. Many online lenders offer an easy application process meaning you can get approved for the funds you need within a few days or a week.

Long Term Loans

One helpful form of business financing to consider is a long-term business loan. Long-term refers to any loan with a repayment period longer than two years. Franchise owners may find long-term business loans helpful for expansion or growth projects, not so much for working capital.

Business Line of Credit

Business lines of credit are another great business financing option because owners can draw on funds when they need them or make purchases. They typically have a set limit that cannot be exceeded; however, many franchise owners find this a useful funding opportunity.

Business Credit Cards

Business credit cards function the same as personal credit cards. With revolving credit lines and a credit limit, they offer franchisees the chance to make payments or purchases then pay them back later. Business credit cards cannot be used as a sole type of financing but work well when combined with other franchise financing options.

Short Term Loans

If traditional funding options from the bank aren’t working for you, you might consider a short-term business loan for your franchise instead. Short-term loans consist of a lump sum of money given, then paid back over a period of six to 18 months. Often the application process is easier for this type of loan, making it a popular choice. Ideal short-term loan candidates often need a clear financial history and a strong business plan.

Business Cash Advance

Business cash advances are a unique mode of financing that many franchises can utilize. This type of funding advances future sales at a discount to the franchise. You are then required to pay a fixed payback amount greater than the amount that was advanced to you. This payment is typically collected by a fixed daily or weekly fee, deducted from a business bank account.

Merchant Cash Advance

A merchant cash advance operates similarly to a business cash advance, however, the repayment process is connected to future credit card sales. A set percentage of these future credit card sales will be taken until the advance is paid back in full. This is a valuable way to fund franchises that accept a lot of credit card sales daily.

Equipment Financing

If you operate a restaurant or other business that relies on equipment, equipment financing is a great way to get the money you need to continue running smoothly. Whether you decide to purchase or lease equipment, equipment financing will help you secure equipment by using it as collateral. Typically you will need an excellent credit score to be eligible for this type of financing.

The Best Franchise Financing

With SBA and other loan options, business owners looking to open a franchise have plenty of opportunities for funding. Though owning a business can seem like a huge risk, franchises have the security of a well-known brand behind them. AdvancePoint Capital can help you secure the right financing and make your franchise dreams come true.

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