Loan To Buy A Franchise
Securing franchise loans to open a franchise business can be a smart choice for an aspiring entrepreneur. Becoming a franchise owner gives you the flexibility of owning a business with the added security of being part of an established brand. However, as with owning any new business, startup costs can be high, and you may require infusions of capital if you encounter hard times. Franchisees must also pay a franchise fee when opening a new franchise, as well as ongoing royalty fees. You truly need a good business plan, healthy cash flow, and solid franchise financing to succeed.
loan to buy a franchise
SmartBiz is a viable online loan option for franchise owners who want the security and low interest rates of an SBA-backed loan but with the ease and speed of an online loan. SmartBiz does not originate loans. Instead, it is a service that matches business owners with SBA-preferred banks.
Funding Circle offers various business lending products, including medium-term installment loans with repayment periods as long as five years, which are ideal for established business owners with a strong credit history.
SBA loans can be used to start a franchise. In fact, the long repayment terms, high borrowing amounts, and relatively low rates of SBA loans can be ideal for franchise financing. Both SBA 7(a) loans and SBA 504 loans can be used to fund franchises.
Getting approved for franchise financing can be difficult, particularly if you need startup funds, you need funding but have bad credit, or your franchise has been open for less than a year. However, you can do a few things to improve your chances of being approved for financing, even if it means you may have to take on a personal guarantee.
As a first-time franchise owner, in-house franchisor financing may be your best bet if your franchisor offers such an option. If you meet the requirements for other loans, compare the lending rates your franchisor provides you and those of outside lenders to ensure you get the best deal you qualify for.
Even as a franchisee of an established franchise brand, you still need to have a plan because no two franchises are the same. Having a solid business plan in place shows potential lenders that you know what it takes to run a successful business and will improve the likelihood that your application will be approved.
Online business lenders represent an important part of the financing industry, as bank loans remain out of reach for many entrepreneurs. Franchise owners benefit from online franchise loans, which have less-strict borrower qualifications than traditional business or SBA loans and put the funds in your account a lot faster.
Generally, online loans have higher rates than bank loans. However, they can be crucial sources of capital to many small business owners, including franchise owners, who would not otherwise qualify for financing. Moreover, some of the best online lenders offer rates that are on par with big banks.
Keep in mind that every lender is different: each likes different franchises and sets different criteria for buyers. A lender will review a number of items from you: personal financial statement, credit report, tax returns, collateral, resume, business plan, and more. From the franchise, a lender will look items such as the franchise disclosure document, training and support provided, historical SBA loan repayment and default rate, and other metrics.
Here are the best and worst franchises to own based on franchise SBA default and repayment rates. Other factors to consider when evaluating a franchise include costs and fees, size and growth, support, brand strength, and financial strength.
Franchise financing is how franchisees pay for franchise fees and other business start-up expenses. Most owners cannot afford to cover these out-of-pocket costs and need to apply for a loan. Still, lenders generally require some personal funds upfront and may ask for as much as 10 to 30% of the total investment in cash.
Entrepreneurs who qualify for franchise financing generally have positive net worth, or more assets than debts. Many franchisors will ask to see a personal net worth statement before seriously considering any investor. They also may require the franchisee to have a minimum amount of liquid assets at their disposal to cover start-up costs, living expenses and other financial obligations until the business becomes profitable.
All franchises, whether they be high or low-end options, require money on the part of the investor. Those with limited funds might need to wait and improve their financial situation before embarking on a new business venture.
Franchisees who have good credit history and a business plan may be eligible for a commercial loan with a bank. It sometimes helps to apply with financial institutions that have experience working specifically with franchises and not just small businesses.
One of the essential success factors in your franchise purchase is ensuring you get the right business loan. Investing in a franchise requires a strategic approach similar to starting any business, including willingness to assess different options for financing your purchase.
Franchise purchase agreements can vary greatly from franchisor to franchisor. Knowing who owns the lease on your franchise location, as well as both repayment and ongoing royalty or revenue sharing obligations, is crucial.
When all else fails, you can always go to a bank and get a personal loan, but only if you have good credit (one reason some turn to crowdfunding). Risks mount here, because if you default on a personal loan, it will affect your credit rating and ability to borrow in future, likely for years to come.
If you have a fat 401(k), there are many specialized lenders who can help you set up a new retirement plan for your franchise and roll over your savings. But be aware that the IRS takes a dim view of ROBS, and has been investigating their legality for over a decade, threatening to disallow them and force entrepreneurs to restore the funds to their retirement accounts. If you go this route, make sure you consult an expert, as your rollover scheme may come under scrutiny.
By contrast, if you borrow or use investors/partners, you can diversify and invest some of your cash elsewhere. This puts less of your total net worth at stake in a single franchise purchase, a smart move that gives you more options.
Starting or buying a franchise offers the opportunity to achieve the entrepreneurship dream while capitalizing on the structure of a franchise system. As this dream takes shape, it's important to determine how a small business owner (SBO) can finance their franchise since many variables affect their ability to secure credit. It's important for entrepreneurs to understand the available financing options and be aware of how "fine print" such as fees, collateral, loan terms and more can impact the total cost of credit. When seeking a loan or line of credit, savvy franchise owners will weigh the pros and cons of finance options including U.S. Small Business Administration (SBA) loans, conventional loans, Rollovers for Business Startups and inclusion of equity investors. With all of these options, which type of financing may be the best fit for achieving business success as a new franchise owner?
One option SBOs may consider are SBA 7(a) and 504 loan products, since these loans can provide cash savings, lower down payments and longer terms than conventional loans. The SBA guarantees a portion of these loans for banks, meaning that these lenders are usually more willing to approve these loans for SBOs who may not have the credit score or history needed for a conventional loan.
SBA 7(a) loans help business owners obtain financing for general business purposes, including working capital; buying equipment or furniture; buying or renovating buildings; and refinancing debt. 7(a) loans of up to $5 million are issued with terms of up to 10 years for working capital and 25 years for fixed assets, compared to conventional loans that typically carry 15- to 20-year terms. Lower equity injection requirements, typically 10 percent, and a longer term (or payback period) create lower monthly payments, allowing SBOs to preserve their cash so they can invest excess funds into their businesses.
Like 7(a) loans, SBA 504 loans require less money down and have longer terms, but can only be used as long-term, fixed-rate financing for purchasing major assets like real estate and long-term machinery or to renovate facilities. This means that any startup cost (including franchise fees) would come out of the franchisee's pocket or be covered through another funding source. The maximum 504 loan amount is also $5 million.
Although 504 loans don't require a personal guarantee, they typically have higher fees than a traditional bank loan. Furthermore, 504 loans require the involvement of three parties, so every month franchisees must pay two different institutions, which can be challenging. TD Bank and many other lenders try to minimize this pain point, but it is still an obstacle associated with this lending type.
Conventional bank loans & LOC for businesses offer cheaper cost of capital with low origination costs and interest rates since they don't require the fees associated with SBA loans. Conventional loans may also appeal to SBOs because there is a perception that SBA loans take longer to close, although banks with SBA Preferred Lender status, like TD, can help fast track this process.1
Furthermore, conventional bank loans can be challenging for startups to secure until they have a proven business financial track record. As a result, banks typically require business owners to put more money into the loan. Like SBA 7(a) and 504 loans, conventional loans do not require SBOs to relinquish business equity to an investor; however, conventional bank loans and lines of credit typically have shorter terms than SBA loans, resulting in more expensive payments.
This lesser-known financial product allows individuals to roll funds in a 401(k) into a ROBS account to finance a business venture. There are no early withdrawal fees, penalties or income taxes on this loan since the money is left in a tax-free vehicle. ROBS offer a low cost of capital since SBOs don't pay fees and instead distribute some investments into the company. This should be done with caution and with the advice of a certified financial planner to ensure IRS rules are adhered to, and SBOs must keep in mind there is a risk that a significant portion of retirement savings will be lost if the franchise fails to generate profit and doesn't succeed. 041b061a72