How to Get a Business Loan for a Franchise

Are you ready to escape the monotony of your regular 9-to-5 job and embark on the exciting journey of becoming a small business owner? If so, purchasing a franchise could be the perfect opportunity to fulfill your dreams. Owning a franchise grants you the privilege of selling products manufactured by a larger, well-established company, often consisting of goods that are already popular among consumers.

When entering into a franchise agreement, prospective franchisees should be aware of certain financial obligations, including advertising fees, a franchise fee, and royalties. While these costs may appear daunting at first, there are various financing options available to help aspiring franchisees. Commercial lenders, franchise financing companies, and the U.S. Small Business Administration (SBA) are among the resources offering financial support for franchises. Additionally, some franchisors even make special arrangements, such as temporarily waiving franchising fees, to assist new franchisees in getting their businesses off the ground.

SBA Loans 

The Small Business Administration (SBA) offers loans of up to $5 million through participating lenders. The most common loan type extended to new businesses is the 7(a) loan, which can be used for purchasing equipment, acquiring inventory, meeting working capital needs, or investing in real estate. The interest rates for 7(a) loans range from 2.25% to 4.75%, depending on the loan amount and repayment term.

Note: The SBA website features a lender matching tool where you can answer a few questions to be connected with a participating lender, typically within two days. 

What is the Maximum Loan Amount for a Franchise? 

The loan limits for commercial loans can vary depending on the lender. If you opt for a loan backed by the Small Business Administration (SBA), there are specific guidelines to follow. For instance, SBA's widely used 7(a) loans offer funding of up to $5 million. Meanwhile, SBA Express loans provide a maximum of $350,000, and SBA Export Express loans go up to $500,000.

Where Can I Secure a Franchise Loan? 

Finding the right financing for your new franchise can be a challenging task. However, there are financing options available that are specifically tailored for franchisees.

Franchisor Support 

Certain franchisors assist new franchisees in starting their businesses by providing partial financing for the franchise fee. They may also collaborate with commercial banks to help franchisees raise the necessary capital for launching their venture. You can typically find information about such financing opportunities on the franchisor's official website or in their franchise disclosure document or agreement.

Note: Before committing to any financing option, it is advisable to compare the terms and conditions offered by the franchisor with those of other financing sources to determine the best fit for your needs.

Franchise Financing 

Companies Numerous companies specialize in funding new franchisees. These entities typically connect borrowers with suitable lenders based on their specific financial requirements. In some cases, these financing companies may even directly provide loans to new businesses.

Business Loans from Banks or Credit Unions 

Arranging a loan from commercial banks or credit unions, such as Bank of America, is another avenue for obtaining franchise financing. Similar to other loan types, these lenders will evaluate your net worth and credit history to determine your creditworthiness. In certain situations, you may also be required to provide collateral to secure the business loan.

Qualifying for a Franchise Loan: Tips and Strategies

If you're considering purchasing a franchise, it's important to devise a strategy that will enhance your chances of securing financing. Here are some valuable tips to help you qualify for a franchise loan:

Understand Collateral Requirements 

Different commercial lenders may have varying collateral requirements for their loans. When it comes to SBA 7(a) loans, collateral is typically not required for loans under $25,000. For loans exceeding $25,000, lenders will follow their established collateral guidelines for non-SBA business loans.

For SBA loans that do require collateral, lenders will typically take a first lien on the assets they finance, including the borrower's fixed assets like real estate. However, if the borrower's real estate equity falls below 25%, the lender may not need to take a lien.

Check SBA Approval for Your Chosen Franchise 

Opt for a franchise that is already registered and approved by the Small Business Administration (SBA). Once a franchise obtains SBA registration, individual franchisees generally do not need to seek additional SBA approval.

This is beneficial as it streamlines the loan application process. Loan applications from franchises already listed in the SBA registry tend to receive faster approval because the SBA already possesses the necessary information for evaluation.

Utilize B2B Financing Options 

If you own a business-to-business (B2B) franchise, you can explore financing options that involve using your clients' invoices. Factoring, for example, allows you to obtain cash advances based on your clients' invoices. A factoring company handles the collection of the full amount owed by your client, deducts the advanced amount and any applicable fees, and then pays you the remaining balance.

Lenders That Directly Pay Suppliers 

Rather than obtaining a general loan, you can inquire with your lender about financing arrangements that involve directly paying your suppliers. This type of financing, known as purchase order financing, allows you to fulfill orders while simultaneously growing your business.

Leverage a Strong Reputation 

Purchasing a franchise from a highly reputable business can enhance your chances of securing financing. Many lenders maintain a list of preferred franchise businesses with proven repayment histories. You can also ask your franchisor to introduce you to lenders who are more likely to accept your loan application.

Franchisors that Assist with Lending 

Certain franchisors provide support to their franchisees by facilitating access to loans. This assistance can take two forms: the franchisor may have a dedicated department that guides franchisees through the loan process, or they may have partnered with loan brokers who help franchisees secure funding. By implementing these strategies and considering the provided tips, you can increase your chances of qualifying for a franchise loan and realize your entrepreneurial aspirations.

Commonly Asked Questions (FAQs) About Franchise Loans 

Q: Can I obtain an SBA loan for a franchise? 

Absolutely! The Small Business Administration (SBA) provides loans specifically designed for individuals looking to start a franchise business. You can apply for an SBA 7(a) Loan, which offers funding of up to $5 million for your franchise venture.

Q: Do banks offer loans for franchise businesses? 

Yes, many banks offer business loans tailored for aspiring franchise owners. To secure a loan, you will need to go through the application process and meet the qualifying criteria, which typically includes factors such as your net worth, credit history, and other relevant considerations.