Franchise Financing Guide

Financing for franchisesWhy It’s Easier to get

…To buying a franchise instead of starting a business from scratch, which we detail here. One major benefit of buying a franchise, that is not covered in the article just mentioned, is financing.

There are many

pros and cons..

1. There is less management risk associated with a franchise. 2. There is rich historical data that the bank can draw upon about the

success of franchises. 3. The Small Business Administration (SBA) is much more likely to

guarantee a loan to a franchise than many other types of startups.

Banks are much more comfortable loaning to franchises for three main reasons

Management Risk

The fact that the business owner has less areas where they have to make critical decisions (The business owner will not have to make critical decisions regarding product mix, suppliers, pricing, and store design) decreases the management risk for the new business.

Historical Success Of Franchises

There is the Uniform Franchise Disclosure Document (FDD) which all franchisors are required to publish. In addition to the FDD, banks can see the repayment history of SBA guaranteed loans by the franchisor.

SBA Loan Guarantee

The SBA is much more likely to guarantee a loan to a franchise than many other startup. The SBA doesn’t actually make loans. Instead, they guarantee loans made by financial institutions. While the SBA doesn’t guarantee 100% of the value of the loan, they do usually guarantee 75% of 7(a) loans.

What Are Your Chances of Getting A Loan To Buy A Franchise?

Of the individual getting the loan. I asked about what credit score a person would need to apply, Geoff Seiber of FranFund answered that a credit quality was more than just a credit score. It involves looking at their current assets and debts, their history, and their personal life.

Depends on Franchise Quality and Credit Quality

“ What credit score would tend to disqualify a person from getting a loan?” He answered that it would be hard for person with a score below 640 to get a loan. In his view, credit scores between 680 – 720 were the “gray area” where some banks might see the credit score as a factor weighing against giving a loan.

After receiving this

answer, I phrased the question differently

The franchisor matters. Some banks have had really positive experiences working with certain chains, and have made a decision to aggressively offer credit to new franchises

In addition to a business owner’s credit quality

What Are the loan terms

you can expect?

To start a franchise, doesn’t mean that they don’t want the franchise owner to have a significant investment in business. Typically, this means putting up 30% of the money needed to launch the franchise.

Just because banks are willing to loan money

1. Selling Investments Or Using Cash On Hand (Good) 2. Taking A Loan From A Tax Advantaged Account Like An IRA (Not Good)

Here is how banks are likely to view the different ways you can

come upwith the cash:

3. Doing An IRA Rollover For Business Startup (Good) 4. Taking A Home Equity Line of Credit (Not good) 5. Getting A Friend or Family Member To Buy Equity In the Company (Good)

Here is how banks are likely to view the different ways you can

come upwith the cash:

How can taking a loan from an IRA be Bad, but an IRA Rollover for

Business Startups be Fine?

Is that the banks and the SBA do not want the funds provided by the business owner to have to be paid back. While a business owner may consider the money in an IRA “their money”, it’s not quite that simple from a legal perspective.

The basic idea

While taking a loan from an IRA is not considered good, using the IRA to purchase stock in a company is fine. A Rollover For A Business Startup (ROBS) enables such a purchase to happen. The franchise owner is borrowing money from a bank that needs to be paid back.

You can learn more about the different ways to come up with the cash you need for a loan here.

The basic idea

Why SBA Guaranteed Loans

Are Attractive To New

Franchise Owners

SBA guarantees are only supposed to be for loans that a bank would not approve if the SBA guarantee did not exist. By definition, it should be easier to be approved for an SBA loan than a normal bank loan.

In theory

Might carry an interest rate of prime rate plus 7-8% for a seven year loan. When this article was written (September 2014), the rate would likely be around 10-11%, as prime rate is 3.25%.

A conventional start-up bank loan

There are strict rules regarding the interest rate that can be charged. For a 7 year loan of more than $50,000, the maximum rate is prime rate plus 2.75%, which would be 6% when this article was written.

For an SBA guaranteed 7(A) loan

Closing Costs Are Higher

For SBA Loans

Closing costs on conventional bank loans can be much lower than on SBA guaranteed loans. Closing costs typically include the cost of the SBA Guarantee. The closing costs on a SBA loan are in the ballpark of 4%, versus conventional loan closing costs of 1%.

One downside of using

an SBA loan

Does your franchise even qualify for an SBA loan? The sba loan

franchise registry

Is a list of franchisors that the SBA in the past has decided that their franchisees are in fact independent businesses. However, this list doesn’t guarantee a loan. If the SBA doesn’t view the franchise owner as operating an independent business, they will not provide a loan.

The SBA Franchise Registry

Beyond the sba guaranteed loan

Start-off with an SBA guaranteed loan, they often re-finance it with a conventional loan when they start expanding to multiple franchise locations. There are two reasons why this happens:

Many first time

franchise owners

The interest rate differential between SBA guaranteed loans radically shrinks as the owner develops a track record of generating consistent cash flow from the franchise.

1.

SBA loans typically require the business owner to provide personal guarantees and pledge collateral, regardless of the size of the business.

2.

Learn More About

SBA Guaranteed Loans

Has a wealth of resources for those interested in learning more about 7(a) loans. For those that want to learn more about the interest rates and fees, click here. If you are looking for guidance on how to fill out the paperwork, click here.

Has a wealth of resources for those interested in learning more about 7(a) loans. For those that want to learn more about the interest rates and fees, click here. If you are looking for guidance on how to fill out the paperwork, click here.

Has a wealth of resources for those interested in learning more about 7(a) loans. For those that want to learn more about the interest rates and fees, click here. If you are looking for guidance on how to fill out the paperwork, click here.

Has a wealth of resources for those interested in learning more about 7(a) loans. For those that want to learn more about the interest rates and fees, click here. If you are looking for guidance on how to fill out the paperwork, click here.