How to Secure a Loan to Buy a Franchise
There are several tasks that should be accomplished prior to setting out to tackle the complex task of buying a franchise.
First, you’ll want to check your current credit score if you haven’t done so already. With a solid credit score, you can move forward and make an application for a small business loan. A common way to go about this is through the Small Business Administration’s 7(a) loan program. Interestingly, the SBA 7(a) program doesn’t directly loan money to businesses.
Interestingly, the SBA guarantees only a part of the loaned amount, which can be anywhere from $5,000 to $5 million with a prime 2.75% interest rate over the course of 7 to 10 years. Collateral is determined by your credit worthiness and the loan amount that is requested.
The SBA will thoroughly review the franchisor to ensure that he or she satisfies each of the SBA’s lending guidelines. Typically, the SBA does not look unfavorably upon franchisors who exert strict controls on the franchisee. Don’t expect to receive 100% financing, even with a perfect credit score and every “I” dotted and “T” crossed.
Another option is a home equity loan, using your home is used as collateral. This has several benefits, such as a low cost, quick turnaround, and usually low interest rates. The lender will calculate the loan-to-value ratio—the amount you owe minus your equity. You can also apply for an unsecured loans. Equipment is used as collateral, and these loans almost always have higher interest rates. Another way to go is security-backed lending, where CDs, stocks, bonds, and other securities are put up as collateral. Up to 70% of the security value can be loaned, and typically at a low interest rate and a pretty fast processing time.
Another alternative is a 401(k)-IRA Rollover Plan. Your franchise get going with retirement funds instead of some other type of loan. It usually takes a few weeks to process, but the nice thing is that there are no taxes, penalties, or debt. That can be worth the trouble.
Finally, funding can be used as an “investment” as opposed to a loan, which allows you to be able to see a profit much more quickly. This funding approach won’t affect the debt ratio or credit rating, and several exit strategies and tax benefits are included. Plus, you can receive a salary. This type of lending product was designed to help bridge the financial funding gap between SBA funding and other funding options.
Every franchisee requires a tailored and specific analysis to find the best funding options. It can be a very complex process and requires the experience of a professional business broker like Andrew Rogerson, who is able to work directly with franchise lenders. Start this process early so you can perform your due diligence to make an informed and educated financial decision.
Don’t be afraid to ask for help, to ask questions, and be prepared. Your franchise will be that much farther ahead. Andrew is very happy to help you with your franchise. To discuss franchise financing issues and to explore franchise opportunities in the Sacramento area, please visit our website Services for additional information. Or you can send an email to Andrew or call him at (916) 570-2674.