Yes, you can get a loan to start a franchise business. To accomplish their anticipated business development, the majority of young franchisers and franchisees require at least one capital infusion. The most popular way to get this money is through venture capitalists or strategic partners.
Firms need financing and will continue to do so. As a matter of fact, while franchisors occasionally provide finance directly through the parent business, it is more normal for them to work in conjunction with preferred lenders that handle loan administration for their franchisees. Franchisees are free to seek a business loan with any bank of their choice.
What Type of Loans Can You Get and at What Interest Rate?
There are different options when it comes to loans for a franchise business and they all come with different interest rates. Sometimes, the interest rate is not fixed and it is based on your credit ratings.
1. Loan from the Franchisor
One of the easiest means of getting a loan to start a franchise business is from the franchisor. A portion of the franchise fee may be financed by some franchisors in order to assist new franchisees in launching their businesses. The franchisors can also work with lenders like commercial banks to help new franchisees raise money to launch their businesses.
The ability to get everything you need from one source is one advantage of using franchisor finance. Some of these programs provide funding not only for the franchise fees but also for the acquisition of the tools and other resources required to launch the firm.
The terms of each franchisor financing agreement will vary, but some assume up to 75% of the debt load from the new franchise owner.
Deferred payments under an agreement may be made when a business is just getting off the ground, or a sliding scale of payback may be used. Before you sign, make sure you fully understand the terms of both your franchise agreement and the financing agreement.
2. Franchise Financing Company
The term “franchise finance” refers to a group of products designed to finance both new and current franchise enterprises. Franchise business loans, invoice financing, trade financing, and lines of credit are some examples of this. Franchise business loans from banks and other independent lenders can also be a terrific method to launch a venture.
Numerous businesses focus on financing new franchisees. These businesses frequently pair consumers with the ideal lenders to meet their financial needs. They might also give direct loans to start-up companies.
3. Business Loans from Banks or Credit Unions
For people who desire to launch a franchise, most banks offer business loans. You must apply and be approved for the loan, which could depend on a variety of factors like your net worth and credit history.
Your business plan and personal credit history will be examined by your lender when you seek a commercial bank loan to buy a franchise. These records will be used by the lender to evaluate your creditworthiness. The bank is attempting to ascertain through this procedure if you can afford to repay the loan you are requesting.
4. SBA Loans
The SBA loan is typically one of the most appealing lending options for prospective franchisees. Loans that are funded by intermediate lenders and partially backed by the U.S. Small Business Administration are known as SBA loans.
In terms of structure, these loans are extremely comparable to conventional term loans from a bank or other lender. But because the SBA mitigates the risk to lenders by guaranteeing a percentage of the loan amount, lenders are encouraged to extend more loans with longer payback terms and cheaper interest rates than they otherwise would.
If you have the necessary resources and credit score to be approved, you should definitely submit an application for an SBA loan since it is undoubtedly a great alternative for financing a franchise.
5. Alternative Lenders
Consider applying for franchise funding through an alternative lender if you need money to start your franchise quickly or if you want to acquire more money to pay off your commercial or SBA loan. Compared to conventional funding options, alternative lenders typically offer fewer onerous requirements and quicker turnaround times.
They provide a range of loan choices, including term loans, commercial lines of credit, and equipment finance. But this accessibility and comfort can come at a price. Compared to their more conventional equivalents, alternative loan products are typically more expensive, have shorter repayment terms, and offer smaller loan amounts.
However, it can be worthwhile if you need to augment your current finance, can’t get a bank loan or SBA loan, or need money right away to take advantage of a once-in-a-lifetime chance.
What are the Requirements and Steps to Apply?
As with any business loan, franchise loan eligibility is based on a number of factors – the prospective owner’s financial history, the strength of their business plan, and how the sector is performing generally.
a. Your Credit Ratings
One of the major requirements that will show that you are qualified for a business loan to finance a franchise is your credit rating. Bad credit makes it challenging for firms or business owners to get bank business loans. This is the reason why a bank will frequently ask a business owner for their credit rating when they apply for a loan.
In essence, having a strong personal credit score is crucial. The better your credit score, the more likely it is that you will receive a cheap rate on a loan. Please be aware that lenders take into account both personal and company credit histories and scores.
b. Cash Flow and Income
The cash flow and income of the business, as well as the debt-to-income ratio of a business, are two more crucial documents that lenders want from a business loan applicant. They can use this information to analyze the loan risk. A business has a better chance of getting a business loan from the bank if its cash flow and income are higher.
A consistent and healthy flow of cash demonstrates to the bank or lender that your company is capable of supporting the loan. Banks or lenders, as the case may be, make it a point of responsibility to look at your business expenses to assess how successful your firm is in addition to the income your business generates.
c. Your Business Debt
The state of your business debt is another pre-requisite that will allow you to secure a loan from a lender to finance your franchise business.
A company that is drowning in debt won’t receive a business loan from a bank. Because of this, before approving any new business loan for you, lenders consider your debt-to-income ratio, which compares the proportion of your monthly debt payments to your monthly gross income.
The majority of banks and lenders demand a debt-to-income ratio of 50% or less. Small-business lenders are cautious when extending credit to customers who have outstanding debt.
d. Your Collateral
The term “collateral” refers to the business owner’s existing physical assets. Without providing the necessary collateral, you cannot qualify for a business loan.
The fact that banks view debt backed by valuable assets as less hazardous means that loans secured by collateral may be easier to get and have lower interest rates. Lenders may require collateral, such as bills, machinery, real estate, and enterprises, in order to approve a loan. Interestingly, collateral may also be needed for corporate car loans.
e. The Industry of Your Business
A condition that will determine whether you can simply apply for and acquire a business loan from a bank or a lender is the industry in which your franchise business operates. This is true because lenders evaluate the risk associated with your industry when approving loans.
Due to the risk and profitability of the various businesses, some loans are easier to obtain than others. For instance, if you run a seasonal business like snow removal, you can be sure that getting a loan from a bank will be more challenging than it would be for a restaurant or a healthcare facility.
f. Your Driver’s License
A driver’s license is an important document that every loan applicant should possess, but surprisingly, if you can complete the prerequisites for a business loan as described above, you will undoubtedly be eligible for the loan without providing your driver’s license.
g. Social Security Card
Your Social Security Card is a key requirement that is necessary when applying for a personal loan but may be disregarded when seeking a business loan from a bank. Once you fulfill the aforementioned criteria, a bank is likely to disregard your social security card.
h. Your International Passport/State ID
Another vital document that is needed when applying for a personal loan but may be neglected when applying for a bank loan for a business is your foreign passport or state identification card.
i. Current Utility Bills
Your most recent utility bills are still another requirement when applying for a personal loan from a bank but can be disregarded when doing so for a company loan. This document may be required by some banks or lenders, however, if you can meet the aforementioned standards, you can easily disregard them.
Steps to Apply
Step One: Fill out Your Loan Application Form
Step Two: Get a Copy of a Signed Franchise Agreement
Step Three: Get a Statement of Your Personal History
Step Four: Get Your Personal and Business Financial Statement, Your Business license, Records of Previous Loans, Tax Returns, Resume and Copy of Your Business Lease
Step Five: Submit Your Application.