Financing Your Franchise

There are several financing options when considering investing in a franchise. You should speak directly with your financial advisors and weigh each option or combination of options very

carefully before making any decisions. If you currently need more than one option, or may at a later time, then it is important to know the potential repercussions of selecting one type over another.

Financing Options:

  • Some franchise companies may provide in-house financing
  • Home Equity Refinance Home Equity Line of Credit
  • SBA Loans
  • Unsecured Loans (Signature Loans)
  • Peer-to-Peer Loans
  • Use Retirement Funds without incurring penalties
  • Family and friends

A franchise is a very predictable and safe way to enjoy the benefits of being an entrepreneur. Financing a franchise purchase is often a topic that people do not address early enough in the process. Although there are many great business and franchise opportunities available, how you finance your franchise venture often determines the level of success you will enjoy. Is your personal credit good? Do you have management or strong work experience? Can you invest 25% as a down payment toward the total cost of the business? Then, you should be able to receive funding toward a franchise investment.

QUESTION: I’ve found the franchise I want, but I don’t have enough cash to completely fund the startup of the business, so I’m going to need to get a loan  I’m just starting to talk to banks and they seem to want a number of things I don’t have, such as a complete business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles or what should I do?

ANSWER: This is one of the most popular questions we receive. The best source of information about your financing options is the franchisor. They should be able to tell you, from experience, how likely it is for you to obtain financing from any particular source. It may also be helpful to understand the principles that underlie your ability to get financing, regardless of the lending source. There are “Cs” involved in any decision to loan money to someone: Cash, Credit, Collateral and Character. The fact is that it doesn’t matter whether you go to a bank, use the SBA guarantee service or go to a friend or relative for the loan.

The same basic rules apply to any successful attempt to get credit.

Here’s how the four Cs work:

Cash
Credit
Collateral
Character

Most lenders request for a complete business plan. You should have a complete business plan before embarking on any new business startup for a host of other reasons besides just financing. The franchisor you’re working with should have a lot of helpful information or even a template already developed for this purpose. Many franchisors have also set up programs with selected financial sources to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain you’ve found the franchise you want to buy, is to request this information from the franchisor and start looking into your options.

Lending Programs:

Small Business Administration (SBA) Franchise RegistryVetFran ProgramMinorityFran Program
The Small Business Administration (SBA) Franchise Registry. In 1998 a central registry of franchise systems eligible for SBA loan guarantees was established. Since registry franchisors have been pre approved the processing time for a franchisee being approved for a loan is shortened. To use this program a franchisee requesting SBA financial assistance needs to provide a one page certification from the franchisor stating that the prospective franchisee’s contract is the same as the form approved by the registry originally.
The Small Business Administration (SBA) Registry lists names of franchise companies pre registered and reviewed to shorten the process for SBA loan applications. Loan applications for registered franchisors can be reviewed and processed quickly and efficiently Listing on this Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee (which could result in affiliation with a franchisor . The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, credit worthiness, conflicts of interest, character, use of proceeds, and dissemination. We can provide you with a list of franchises on the SBA Registry.
Learn More About SBA
The Veterans Financial Franchise Initiative (VetFran) was initiated in the early 1990s as a way for franchisors to thank members of the military for their service during the Gulf War. VetFran allows service members to pay only 10 % or less of the total initial investment cost of purchasing a franchise. That difference between the required franchise fee and what the franchisee has available to invest is contributed by the participating franchisor as part of an “initial earned equity”. Many International Franchise Association (IFA) members participate in the program. The franchisee must be able to qualify for an SBA 85% loan guarantee package. At the present time VetFran is limited to franchises with initial investments which are $ 150,000 or less.
Learn More About VetFran
Provides minorities and women discounts; typically on the franchise fees. Patterned after the successful Veterans Franchise Transition Initiative (VetFran), the primary goal of MinorityFran is to assist franchisors that are interested in increasing the number of minorities in franchising. Minorities, including African-Americans, Hispanic Americans, Asian Americans and Native Americans, will account for the lion’s share of new population growth in the U.S. in coming years. In 2002, latest year for which the U.S. Census data is available, nearly 20 percent of all franchised businesses were owned by minorities, compared with 13.2 percent of non-franchised businesses that were owned by minorities.

The Franchise Search Group can point you to financial companies that work in the franchise community. The Franchise Search Group has a series of relationships that can help you find the best franchise lending options to meet your business ownership dreams.
Learn More About MinorityFran

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