Buying any kind of business involves making an investment but learning how to get a franchise loan adds in some differences from purchases of other types of businesses. In this article, we’ll explore the most common financing alternatives franchise buyers may consider, then explain what lenders will expect to see so you can improve your chances of getting approved for a franchise loan.
No two business acquisitions are exactly the same, and that’s especially true when it comes to franchise acquisitions. When you buy a standalone business, you’re typically buying the facility, the name, the assets, and the reputation the previous owner(s) have earned. With a franchise business, you may also be buying a building and assets, but what you’re actually purchasing is the right to do business under an established name and in accordance with franchisor standards. The benefit of that approach is you’re gaining access to a proven business model, established reputation, and (often) a much stronger marketing presence than you could attain on your own.
If you’ve decided to pursue the acquisition of a franchise, you may be able to select from several different ways to obtain financing. We’ll look at the most common.
What are the financing options for a franchise?
Franchisor financing, Individual financing, Bank loans, SBA loans, Specialty lenders
Some franchisors have established programs to help new franchisees obtain part or all of the funds they need directly from the franchisor or through a partner such as a commercial lender that works closely with the franchisor. An advantage of this approach is that the franchisor’s success depends largely on having successful franchisees who feel a strong sense of loyalty and obligation to the franchisor, so the financing terms may be advantageous. For example, the franchisor might be willing to defer repayment or raise it gradually over time to help the new franchisee build the business.
However, many programs of this nature may only cover part of the total cost, so the prospective buyer may have to line up additional financing to complete the acquisition. As with any kind of financing, it’s important to fully understand the terms and costs, and to have your CPA and attorney review all documents before signing.
Some potential franchisees turn to families and friends as a source of financing. Family members or friends who have achieved financial success may be willing to help the prospective franchisee get started. However, borrowing this way (especially within families) may lead to strained personal relationships and battles. Even though both borrower and lender likely know each other well, it’s important to have a contract that clearly spells out the terms and expectations to minimize the potential for arguments.
A newer approach you may wish to consider is what's known as "crowdfunding." With this approach, a borrower sets up a funding request on an established crowdfunding website (or a site of their own) explaining the plans for the purchase and inviting visitors to put money toward the plan. Some crowdfunding sites expect the borrower to pay the money back over time, while others may treat funds as donations.
Bank loans
Commercial banks (and increasingly, credit unions) may offer traditional business loans to prospective franchisees. Each financial institution sets its own standards and terms for loans, and some may be less eager to lend to a new franchisee than others. Typically, bankers will expect to see a detailed business plan and review your personal credit history (and net worth) to be confident you’ll be successful enough to repay the loan. As you’d expect, the better your credit and previous business success, the more likely the lender will be willing to work with you. In some cases, the lender may expect collateral a lien on your personal assets.
Small Business Administration loans
Contrary to popular opinion, the Small Business Administration (SBA) does not directly offer loans to businesses. Instead, when we refer to an SBA loan, what the federal agency actually does is offer some level of guarantee to a commercial bank that’s willing to make the loan. That guarantee protects the bank in the event the borrower defaults on the loan.
There are different types of SBA loans with varied terms and interest rates. Some may require a prospective franchisee to provide a lien on their home, which places your personal assets at risk. Another issue with SBA loans is they may require extensive paperwork, and because both the lender and the SBA have to approve applications, it may take significantly longer to obtain financing.
Specialty lenders
An excellent option for many prospective franchisees is to work with a lender that specializes in making loans for franchises. Lenders like First Franchise Capital® have developed special financing plans that reflect the nature of operating a franchise. Because they already have a solid understanding of franchises, they may be more willing to extend credit than traditional sources such as commercial banks and may be able to make faster approval decisions.
The most practical way to begin your effort to get a franchise loan is to talk with specialty lenders so you have a better understanding of their process and expectations. Often, a conversation with a sales representative from the lender will give you a good sense of how eager the lender may be to offer you a loan, what types of terms may be involved, and how easy the process will be.
The lender’s sales representative is familiar with their employer’s approval process and lending standards, so they can give you a good sense of what to expect. That way, you shouldn’t face any surprises. If a particular lender doesn’t seem to be interested in your loan, it’s a sign you may not want to take the time to apply.
Depending on the lender you choose, the application process will be the next step. Once you’ve submitted your application, the lender’s underwriting department will review it closely and examine other factors such as your personal creditworthiness. Don’t be surprised if the underwriting staff makes several requests for more detailed information as their review goes on. This process can take anywhere from a few days to several weeks. After all relevant documents are analyzed and the loan is approved, the lender and borrower sign the loan documents and the funds are disbursed.
Because First Franchise Capital works exclusively with franchisees, our lending programs are built around this industry's unique characteristics. Our in-house team understands the true costs of various franchise programs, so they can make sure you're fully informed and better able to decide with confidence. Over the years, we've helped thousands of franchise buyers turn their goals into realities, and we'll be happy to help you.
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