.jpg)
Deciding that you want to be a business owner is easy. Then it gets a little more difficult narrowing down exactly what business you want to own. Then you have to figure out how to pay for it. Fortunately, there are quite a few options to choose from.
This article will discuss some of the most prominent methods for obtaining a loan to get your business off the ground. It will also give some information on the things to do before starting to apply for any loans to give you the best chances of getting approved.
SBA Loans
An SBA loan is a small business loan partially guaranteed by the government (Small Business Administration). The SBA doesn’t do the lending. Rather, they work with different approved financial institutions, primarily traditional banks, that lend money to small businesses offering better terms because the SBA partially guarantees the loans.
For banks, this means that the SBA will back part of the loan they give if you, the business owner, are unable to pay back the loan. There’s a lot of preparation required to submit for franchise loans from the SBA, so go into the exercise ready to gather what you need and to be patient. So, when deciding how to finance a franchise what are the different types of SBA loans? Here is a good overview:
7(a) Loans
The 7(a) loan program is the SBA’s most common one because it is the most versatile. It includes financial help for a multitude of things such as working capital, debt refinancing, business acquisition, and buying fixed assets.
The loan terms will vary depending on the qualifications of the borrower and how the funds will be used. You can get up to $5 million through this program with an SBA guarantee of 85% on loans under $150,000 and 75% on loans over that value. Eligibility requirements for this loan include, but are not limited to:
For-profit businesses based and operating in the US or its territories.
Businesses with fewer than 500 employees
Businesses with “reasonable” owner equity.
Think of it this way, if you need to borrow money for inventory, buying a business, or refinancing your general business debt, this loan is the choice for you.
504 Loans
There are similarities between this loan and the 7(a) loan, however, you can only get this loan to purchase, improve, or refinance fixed assets, such as real estate or equipment.
The primary purpose of this loan is to stimulate the economy, so there are strict job-creation goals you must meet to obtain it. For instance, to get this loan, you must retain one job for every $65,000 you borrow.
This loan is tailored more for buying or upgrading real estate and financing equipment because it gives better rates for these purchases.
Microloans
Microloans are loans of smaller dollar amounts typically used to help small businesses grow. An SBA microloan ranges from $500-$50,000.
The SBA gives funding to designated brokers, which are non-profit community-based institutions. These institutions administer these loans to eligible borrowers. Most microloans require some kind of collateral as well as a personal guarantee.
There are many different ways to use a microloan: working capital, inventory, machinery, equipment, supplies, and more. *NOTE - A microloan can’t be used to pay existing debt or to purchase real estate.
Private Loans
Franchise financing can be accomplished in different ways, and private loans are just one of them. Many franchisees can buy into a franchise because they accept a loan from a family member or friend. Because of the personal relationship, these loans can come at a good financial price, but be mindful that there can be other costs when borrowing money from friends and loved ones.
Too many relationships have been strained or have ended because of money lending. For this reason, be sure to write a loan agreement laying out, at a minimum:
What the borrower’s written promise is to repay a sum of money to their lender.
The terms of the loan, including the repayment plan, between the lender and borrower.
It is a mistake not to consider what can go wrong with a private loan and not to write a contract upfront to mitigate potential breakdowns.
Franchisor Financing
Franchise financing is a great option if you can find one that offers “in-house” loans. Keep in mind that it’s not a very popular method for various reasons, so the franchisor may, instead, offer a Preferred Franchise Lender. These are lenders that partner with the franchisor who, in turn, uses them exclusively for making a franchise loan. Some franchisors may not have a preferred lender list, but they will give you a list of lender names that you can research on your own.
No matter which lender you work with, they all want you to succeed. However, through their lending, a franchisor is uniquely motivated to see you be a success because your success is their success. When considering financing, whether a franchisor does or does not offer “in-house” financing may make a difference for you when selecting a franchise.
What To Do Before You Apply
Before applying for a franchise loan there are items and situations to consider so 1) You can determine your ability to get a loan and what kind of loan and 2) You are well prepared for the loan process. Here are some steps you can take prior to applying for a business loan:
Write a business plan showing that you have the knowledge and skills to run your business. Show that you understand the financial needs, your strategy, goals, your competition, etc. Your business plan is the first thing a lender will look at. If it’s not written to their satisfaction they won’t go further.
Have your financial statements ready. Understand what the business will cost (you should have this information from your franchisor) so you know how much of a loan you need.
Understand your credit history (good or bad) and the collateral you’ll need prior to applying. Lenders will look at your credit and collateral when determining if and/or how much they are willing to lend you.
Understand the cost of a loan and, most importantly, research your loan options.
Choose Wisely
When choosing how you will finance a franchise, choose wisely. It is up to you to do the research and get whatever help you need to make the best choice for borrowing.
Once you’ve done all you can to prepare for applying, there will be different lenders with different options. Look at ALL your options, both large and small banks. While larger banks may seem to have some great offers, look into the smaller local banks as well. Do this for two reasons:
Their options for lending may be as good as the larger banks, or better, and it may be easier to get approved.
Working with a small local bank with a history in the community and a more neighborhood feeling can sometimes provide you with a more welcoming and personal experience.
As a final thought, financing your franchise is only one of many steps to being a franchise owner. By the time you get to this step, you’ve probably put in a lot of time, thought, and energy toward your pursuit. When you get thinking about how to finance a franchise, make sure that your choice of lender fits your strategy, your goals, and the long-term outcome you want.
Choose wisely and the future can look bright!
