• Opening a franchise of an already established business chain may seem like a fast track to entrepreneurship, but going that route requires a significant financial investment.
• There are several sources of funding for people looking to open a franchise, including the Small Business Administration, traditional banks, and the franchisors themselves.
• As with other types of loans, details such as your business plan and personal credit score will be heavily considered in a lender’s decision whether or not to offer you a franchise business loan.
• This article is for small business owners or entrepreneurs looking to get a loan to cover franchise costs.

There are some advantages to starting a business as a franchisee – for example, you won’t need to create a complete business model by hand – but opening your own location still comes with significant costs that may require you to find work. funding. Just as there are a myriad of business loan options for traditional entrepreneurs, there are several loan options that can help you jumpstart your franchise adventure.

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What to consider when choosing a franchise loan

Before starting your own franchise, it is important to consider some of the costs that are often overlooked, as well as the expected expenses associated with starting a business. Usually you need thousands of dollars for each step, and unless you have the cash on hand, you will need to secure at least one deductible. Commercial loan.

Here are some of the expenses you should expect to cover with franchise loans:

• Legal fees for a franchise lawyer to review the franchise contract for you
• Real estate and construction costs for your new selected franchise site
• A franchise fee which may vary from $ 20,000 to $ 50,000, on average
• All additional costs for supplies, inventory and daily operations

When selecting a franchise business loan, make sure that it is large enough to cover some or all of these costs. Some lenders have stipulations on what constitutes an approved use of their funding, so be sure to double-check the lender’s rules before applying.

As with any other type of loan, there are some things you should consider before applying. In the case of franchise business loans, consider how much money you need to borrow, how long will be the repayment term, and what interest rate will be charged each month in addition to the principal. These three points should be among the most important considerations, as they will determine your minimum monthly repayment charge and the length of those payments.

Other considerations include the potential need for pledge of guarantee, the extent of the application process and the time it takes you to receive the actual funds provided by the loan.

To remember : Franchise loans work the same way as other business loans. When applying, be sure to keep in mind any franchise costs that the loan will need to cover.

Franchise Business Loan Options

When thinking about opening a franchise, you should start researching your financing options. Although you end up taking out a loan, keep in mind that there are several ways to get the capital you need. Here are some financing methods to consider:

1. Financing of franchisors

As a potential franchise owner, you are in a unique position because you are effectively helping a much larger business grow into a new market. As such, this business has an incentive to help you run your business more smoothly. This is why, in many cases, parent companies offer an internal financing option to help cover costs.

“Your first port of call for financing should be your franchisor, who may be able to offer you money,” said Ethan Taub, CEO of Debt.

If this is your first time opening a new franchise, this can be your best and easiest financing line. When you start to discuss this option with the franchisor, make sure you have an overview of the requirements and conditions before agreeing to anything. After you compare the franchisor’s offer with the offers of external lenders, you will have a better idea of ​​which option is best for your situation.

2. Loans from friends and family

Sometimes your best option is to apply for loans from friends and family. It might not be the most comfortable thing to ask people, especially in times of financial uncertainty, but this type of loan will usually come with little or no interest and lenient repayment terms.

However, be aware that this type of agreement can become a rift between even the closest friends and family members, so be sure to put an agreement in writing and commit to meeting repayment expectations.

3. Commercial bank loans

One of the most common ways to get franchise financing is to apply for a bank loan. Traditional term loans are commercial loans granted by a bank. These loans provide the money up front and you pay that amount back over time, with interest, every month.

Lenders are risk averse, so they’ll want to make sure your financial situation makes you a creditworthy borrower. You’ll need to provide additional information, including your credit score, guarantees, a business plan and annual income, said Emily Deaton, financial reporter at LetMeBank. The better your financial situation, the better the rates and terms you will receive.

Having a franchise backed by an already established business could work in your favor, Deaton said.

“Banks will feel more confident to give you a loan if you franchise an established business rather than starting your own business from scratch,” she said.

4. SBA loans

If you don’t qualify for a traditional bank loan, one of the best avenues for a small business to explore is a SBA loan – more precisely, the 7 (a) ready. SBA loans are approved and funded by banks and other lenders, but they are partially guaranteed by the SBA. As such, lenders are prepared to offer a lower interest rate and a longer term, so your monthly repayment costs may be lower than other financing vehicles.

5. Alternative loan options

While the above options are more common, there are many other lenders you can consider when looking for financing. However, there are a few caveats to keep in mind. Options such as unsecured loans, business financing that borrows on your 401 (k) Where investments, and various types of credit often result in a rapid injection of liquidity at the expense of higher interest rates and shorter repayment periods. These options are more expensive, but may be worth considering if you have bad credit and cannot get approval for a more traditional financing option.

To remember : There are many ways for you to get financial support for your franchise. The best option for you largely depends on your individual needs and your financial situation.

How To Get Approved For A Franchised Business Loan

Now that you know the different types of franchise business loans, you may be wondering how to apply and get approved. Keep in mind that all loans and lenders are different, so make sure you get a detailed list of requirements for each option. Here are some general tips to get you started:

Have a business plan.

Lenders are risk averse and they don’t make loans without having a thorough knowledge of what their funds will finance. Most lenders will therefore want to understand your business.

“You need a business plan to be able to get a business loan, with an outlook that you can pay them back the amount you want to borrow, with evidence if possible,” Taub said. “You have to have a plan in place to be able to repay the money. This is the most important thing they ask for when you borrow money for a business.”

As a franchisee, you are one step ahead of any new business entrepreneurs in this regard, especially if the franchisor is a well-known business. However, you will likely need to provide a business plan when applying for the loan, so it will do you good to write one up. [Read related article: Writing a Business Plan? Do These 5 Things First]

Work on your credit score.

Your credit score matters a lot when you apply for a franchise business loan. Credit scores are determined by a number of factors, including how much credit you have, how much credit you use at any given time, and how often you make your payments on time. If you have a high credit score, lenders offer lower interest rates and longer terms because your score shows that you are responsible for the money loaned to you. The opposite effect occurs if you have a lower credit score.

Since you won’t have a business credit score, your personal credit score will likely come into play when you apply for a franchise business loan. If you know that you will need a good credit score up front, you should try increasing that number.

Be prepared to make a down payment and / or pledge collateral.

Some lenders feel comfortable providing a franchise business loan only if the borrower provides a down payment or some sort of collateral. If this is the case, it is important to determine how much of a down payment or collateral you will need to get your loan approved.

If you go for collateral, make a list of your assets, determine their market value, and decide which ones you are willing to put as collateral. Remember, if you don’t repay your loan and things go wrong, the bank will collect that collateral by selling the assets to make up for any lost funds. Assets can include things like real estate, business equipment, stocks, and home equity.

Down payments are another method for lenders to reduce risk. A down payment shows how serious you are in getting that loan and investing in your business as it usually requires a substantial investment.

“Down payments vary depending on the type of franchise you’re interested in, but the upfront fees can range from $ 500 to $ 2,000,” Taub said.

To remember : When you apply for a franchise business loan, lenders take your business plan, personal credit score, and down payment or collateral into account.