For many aspiring franchise owners, the biggest obstacle they face is in securing the necessary funding or financing to purchase the business of their dreams. In effect, this is a down payment on your future as a small business owner and operator. But rest assured, there are many avenues to secure the capital you need to become your own boss, which is why FranNet of DFW & Oklahoma has put together this update on the industry’s lending landscape.
To get you pointed in the right direction, here are the updates on various types of funding options most commonly used to purchase a franchise business.
In house-financing is a great starting point for considering your options. It’s quite common for the franchisor – or parent company – to offer their own financing for franchisee candidates. If this option is available, it often comes with special offers and discounts for those wishing to explore multi-unit ownership. Depending on the franchise brand you go with, there may be internal financing available, so be sure to inquire upfront during the investigative process.
Small Business Administration (SBA) Loans
With the U.S. Small Business Administration (SBA), there are several types of loans to consider. One of the most common franchise funding sources is the SBA 7(a) loan. This is a type of loan that’s particularly helpful for candidates who don’t qualify for traditional bank loans – or if the terms aren’t quite favorable. With an SBA 7(a) loan, candidates can use them to fund essentially any purpose, up to and including equipment and inventory. The only drawback of the 7(a) loan is that it cannot be used for ongoing franchise fees or royalties. As for a funding range, SBA 7(a) loans can be secured for up to $5 million – and the terms typically range from 10 to 25 years. The interest rate for this loan vehicle usually comes in between 7% – 9.5%. However, this rate can also vary, depending on the lending institution guaranteeing your loan.
SBA 504/CDC Loans
There are additional types of SBA loans available for startup businesses, with certain variables to consider. One such example is the SBA 504/CDC loan, also popular for franchise funding. These loans are typically more direct in their purpose, and also require the funds to be utilized for a fixed asset, such as real estate or equipment. The benefit here is that the interest rates with an SBA 504/CDC are almost always better than what’s offered for the SBA 7(a) loans. For SBA loans, most lending experts recommend having about 40% of the loan on hand in the form of liquid assets. This may present a challenge – especially if you need to borrow a larger sum. However, these requirements and stipulations are frequently subject to change, so before you’re ready to move forward with a franchise concept, re-investigate your precise financial requirements before applying.
Alternative lenders will always play a part in franchise funding. The application process is usually less lengthy, but alternative funding may have fewer appealing interest rates and terms than a typical SBA loan or in-house financing. There are several alternative lenders who do specialize in franchise funding – as they understand and appreciate the business model.
Before you make any final decisions on a funding or financing source, get a second opinion. Especially if you’re working with the franchisor and/or a franchise consultant like FranNet of DFW & Oklahoma. Both should be more than willing to review your funding choices with you to make sure you’re getting the best financing option. Regardless of which financing option you choose, the launch of your franchise will be an exciting time – one with plenty of details to cover. So, it’s advisable to get up to speed on your options early on in the process. FranNet of DFW & Oklahoma can provide you with resources and contacts to help you get the ball rolling on the prequalification process. Once you’re armed with the best information, you’ll be ready to make an informed decision on your funding option.
If you or someone you know would like to explore an entrepreneurial future, simply reach out and schedule a no-cost, no-obligation meeting with FranNet of DFW & Oklahoma. We’ve helped hundreds of entrepreneurs in North Texas and Oklahoma become their own bosses and secure a financial future that belongs solely to them. And we can help you do the same! Give us an opportunity to guide your personal entrepreneurial journey, and we’ll introduce you to a whole new world of possibilities through franchise ownership. Getting started with your personal entrepreneurial profile is easy – just ask us how!