Franchise Financing Options
You've made the decision to be your own boss and found the ideal franchise opportunity. Now to make your dream a reality, all you need is the financing. Fortunately, there are many financing options that can get your business off the ground.
Providers of business loans want applicants to have a strong business plan and usually expect them to supply about 30% of the total capital required to fund the business. One of the major advantages of franchise opportunities is that there is an established, well conceived business plan already in place.
With that in mind, let's explore some of the most popular avenues for financing a franchise:
The United States Small Business Administration
For many, the U.S. Small Business Administration (SBA) is the first place to look for obtaining financing for a business venture ... including franchise opportunities. SBA loans offer competitive rates and longer terms ... no points ... no balloon payments ... and no prepayment penalties.
Many business owners find cash flow to be a major concern. For them an SBA guaranteed loan may be the answer and possibly the best way of obtaining long term financing, and is the most popular, common loan program for start-up franchises. SBA guaranteed loan terms typically range from 7-to-25 years, fully amortized, depending on the purpose of the loan.
Most for-profit small businesses are eligible for an SBA loan, however loans are generally limited to one million per person. The interest rate will be determined by the project size, loan term and the borrower's credit history. The rate will never exceed The Wall Street Journal prime rate plus 2.75%, as mandated by the SBA.
To qualify a business must be independently owned and operated for profit. It must meet certain criteria in terms of size, number of employees and annual sales. You may find it interesting than more than 90% of the nation's companies are classified as "small" by the SBA standards.
The SBA offers a variety of loan programs to meet an assortment of small business needs. The Guaranteed Business Loan Program is popular among franchisers. Here the government guarantees loans made by private sector banks and other lending institutions.
Another viable SBA option is the Low Documentation Loan Program (aka LowDoc). This program is designed to streamline the SBA loan process and has proven to be an efficient means for obtaining loans of $100,000 or less. As such, LowDoc loans are ideal for a host of franchise opportunities. Advantages include a one-page application form and a quick approval process with most applicants receiving a response within three days. However, borrowers must display a comprehensive understanding of the business ... financial management ... and have a good credit history and relevant work experience.
Licensed by the SBA, the Certified Development Company (CDC) is a private non-profit organization providing "504" loans for small and mid-sized businesses. SBA 504 loans are available for financing commercial buildings or for purchasing machinery or equipment. With the 504 program, the franchisee is only needs to make a 10% down payment. A primary lender covers up to 50% of the mortgaged amount and the CDC making a fully guaranteed second position loan for up to 40% of the mortgage.
Commercial Bank Loans
You can secure a business loan for your franchise via commercial banks and other financial institutions. They can provide term loans ... lines of credit ... and commercial mortgage loans to help the franchise buyer fulfill their financial needs.
Some banks offer flexible financing to meet cash flow needs via secured or unsecured loans and revolving lines of credit. An advantage of working with a bank in the community where your franchise will be situated is the bank's ability to offer local decision-making, fast response and convenient servicing of your account.
Commercial banks can provide competitive rates and terms tailored to your individual franchise. Long-term and short-term arrangements can be structured with fixed or variable rates.
Each bank is different and can offer different commercial loan possibilities. However, many banks are still reluctant to offer financing to small businesses ... especially in today's highly regulated banking climate.
Direct Financing Via The Franchisor
Approximately 30% of franchises companies offer financial assistance and will assist the franchisee obtain financing from a bank or other lending institution. Some franchises provide direct financing programs, loan guarantees and an array of leasing programs for property and equipment needed to operate the franchise.
The franchiser should be extremely knowledgeable concerning the financing of their opportunity -- if not don't do business with them. At the very least, the franchiser should provide you a list of bank and non-bank lenders with which they have established a good working relationship.
Other Financing Possibilities
In a few states, Business and Industrial Development Corps (BIDCOs) can provide long term debt financing to small businesses. They operate under the auspices of federal guarantees.
Venture capital firms typically specialize in certain areas of business and seek a high rate of return on investment. They may require a good share of the business with a fixed buy back term at a guaranteed price.
Finally, there are a number of investment companies that specialize in unique financing situations such as sale lease back arrangements for property and equipment.