Franchise Business Loan

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Franchise Loans for Your Franchise Business

Franchising a business doesn’t guarantee success. In fact, franchise companies are more prone to cash flow shortages due to the number of fees they need to pay. Aside from operational expenses and business investments, a franchisee must adhere to the fee guidelines set by the franchisor, which could range from a few hundred dollars to thousands. Given the financial responsibility, it’s no wonder why franchisees often turn to franchise business loans for help.

Royalty and advertising fees are often taken from your weekly or monthly sales and earnings. Sometimes, franchisers must pay for their employees to undergo training programs that are required by the franchisor. And in some cases, franchisors might require local advertising on top of standard advertising fees.

Franchisees must also pay a franchise fee before they even own the business. On top of all of these mandatory expenses, there are also other inevitable business expenses such as new equipment or furniture, and payroll. These costs can easily pile up, making it difficult to earn a profit or save money as they go.

SMB Compass wants your franchise business to thrive in today’s competitive market. When you work with us, we will help you find the right financing product that positions your franchise up for success.

Many franchisers assist franchisees in establishing their franchise businesses by providing financial funding. However, franchisees still require financing to meet their working capital requirements. Traditional banks usually do not offer franchise financing. On the other hand, franchisees can always get small business loans for their franchises from several lending institutions. This will help them cover their working capital needs, equipment, renovations, and other expenses. Franchise owners have a wide range of business loans to choose from, and with enough research, they will be able to pick the best one for their franchise.

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4 Ways to Utilize a Franchise Business Loan

Business owners know that finding the right business to the franchise is challenging. However, finding the right small business financing is even more challenging. SMB Compass knows that franchises need working capital to succeed. We believe in and are dedicated to your success. That’s why we source our unbeatable business loans for you.

Here are four ways how you can use a small business loan to generate a maximum ROI:

Franchise Fee Payment

Royalty and Marketing Fees

Additional Working Capital

Inventory

Equipment

Like other businesses, franchisees need equipment to carry out their day-to-day operations. It could be a photocopy machine, an ice cream maker, a car, or any machinery that will help them boost their revenue. Unfortunately, equipment purchases tend to cost a lot. With the different franchise financing options, the franchise owner will have the capital necessary to purchase the machinery and avoid potential cash flow issues.

Payroll

If your franchise is prone to fluctuating revenue, especially during the slow season. This makes it harder for owners to meet the month-to-month financial demands of the business. Sometimes, this could also mean that payroll might be delayed.

To avoid late payments to your employees, applying for franchise financing options can give ou the capital you need to pay your employees on time and avoid high employee turnover rates and low employee satisfaction.

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Top 5 Franchise Loan Programs for Your Franchise

SMB Compass will walk you through our personalized selection of franchise business loan options. Whether you need to pay for franchising fees or add working capital, our financial advisors will find the best small business funding source for you. Here are some of our popular loans for franchises:

SBA 7(a) Loans

The Small Business Administration encourages lenders to offer loans to small businesses by pledging 85% of the loan. This means that, compared to bank loans, an SBA loan is more accessible for small business owners.

This type of program often offers more attractive terms compared to traditional loans, but before you can qualify for SBA funding, the Small Business Administration has to approve your franchise and list it on the SBA Franchise Directory.

Otherwise, you won’t be able to qualify for an SBA loan. To get listed on the SBA Franchise Directory, the franchisor must submit their Disclosure Document (FDD) to the Small Business Administration (SBA) for review.

SBA CDC/504 Loans

A franchise business needs cash to invest in commercial real estate, renovations, development, and equipment. Another SBA Loan program, called the SBA CDC/504 Loan, is specifically designed for hard asset investments.

The SBA CDC/504 loan involves three key players: the Certified Development Company (CDC), private lenders, and business owners. Approximately half of the funding will come from the SBA-preferred financial institutions (traditional banks or alternative lenders); 40% will come from the CDC, and the remaining 10% will be shouldered by the franchise business owner and will act as the down payment for the loan.

Once approved, a franchise business can use the proceeds to acquire real estate or purchase equipment needed to run their business effectively. It’s worth noting that SBA CDC/504 loans are not intended for working capital use, inventory purchases, and other purposes other than hard asset investments. However, the SBA loan can be used to refinance existing debt - given that the debt was used to acquire assets.

SBA Loans are the best franchise loans for people looking to buy a franchise because it offers low-interest rates, high loan amounts, and long repayment periods. While the benefits are ideal, it’s also the most difficult to qualify for. Franchise owners need to have a stellar credit score, solid financial track record, and at least 2 years of business history to qualify.

Business Line of Credit

In a business line of credit, lenders will grant a credit line that franchise owners can access on an as-needed basis. The maximum credit limit will be determined based on the business’ qualifications.

With a line of credit, you can withdraw funds whenever needed as long as you don’t exceed the set credit limit.. There are no interest charges until the funds are withdrawn, and you only need to pay back the money you’ve used.

A business line of credit can be secured or unsecured. A secured business line of credit requires collateral. On the other hand, an unsecured line of credit does not require collateral but may be more expensive (i.e., high-interest rates and fees).

Multi-Year Term Loan

With a multi-year term loan, franchise businesses can pay back the loan within two to five years. This financing option has affordable monthly payments, yet gives you more than enough cash flow to cover business expenses. You must have strong business credit, good historical cash flow, and good personal credit in order to qualify.

Eligible franchise owners can use the funds for a variety of purposes, including real estate acquisition, purchase of machinery, inventory, renovations, and more.

Short-Term Loans

Short-term loans are term loans with a repayment period of less than one year (18 months for some financing companies). These loans are designed to address the short-term needs of the business, like payroll, equipment purchase, or working capital.

Short-term loans are typically easier to qualify for. Since they’re usually offered by an alternative lender (banks don’t offer short-term loans), they may be flexible when it comes to eligibility. However, considering that the lenders are facing high risk, the loan option may come with higher interest rates and fees.

Bridge Loan

A bridge loan is another franchisor financing with a repayment period of less than one year. The main purpose of a bridge loan is to help small business owners obtain temporary financing while they wait for a more comprehensive and permanent financing solution to come to fruition.

A bridge loan can be obtained from alternative lenders. If you’re planning to apply for a bridge loan for your franchise company, know that lenders may charge higher interest rates than a typical small business loan option.

How to Apply for Franchise Financing

When it comes to applying for franchise financing, one thing to remember is that the eligibility criteria will depend primarily on the product you’re applying for. For instance, the application process for SBA loans is usually longer and more tedious compared to short-term business loan applications. Other than that, the application process will also depend on the type of lender you’re working with (e.g., online lenders might have a shorter and faster application process).

Although the application process for any franchise financing differs, the lenders will most likely look at the same factors when assessing your eligibility. We’ll outline what these are below.

Personal credit score

One of the first things that lenders look at is the franchise owner’s personal credit history. Essentially, the credit history will tell the lenders how reliable you are, the franchise owner, as a borrower.

Personal credit scores range from 300 to 850. The higher the credit score of the franchise owner, the more reliable they are as a borrower.

With that, you must aim for a credit score of at least 650 to qualify for loans with flexible terms (i.e., low-interest rates, long repayment periods). This is especially true when you’re applying for traditional bank loans and any SBA Loan. Other alternative lenders may also be willing to work with franchise owners with low credit scores, but their loan options will most likely be limited, and the terms won’t be as flexible.

Financial standing

Another important consideration when applying for franchise financing options is the borrower’s finances. This helps the financing institution gauge whether you’ll be able to pay the loan back or not.

When applying for any franchise loans, whether bank loans or loans from alternative lenders, expect to show the following financial documents:

Cash flow statement
Income statement
Balance sheets
Personal and business bank statements
Personal and business tax returns

Be sure to check with the financing institutions as some of them may require more financial documents. The sooner you submit the additional documents, the faster the decision will be.

Time in business

As for some franchise loan types, lenders will require the business to be established. One way to measure this is through time in business. Businesses that are at least a year old are assumed to have gained momentum and are deemed ready to take in more financial obligations.

If you’re applying for an SBA loan, lenders will most likely require you to have at least 2 years of business history. Other franchise financing options, on the other hand, especially short-term loans, may work with businesses with less than one year of business history. However, expect these types of franchise loans to have expensive fees and rates.

Business plan

If you’re applying for traditional bank loans, long-term loans, and SBA loans, even though your franchise already has an established plan on how you can succeed, you’ll still need your own business plan.

Your business plan will serve as your roadmap. For the lenders, your business plan serve as their basis for your success. They will evaluate your goals and how you plan on achieving them. From there, they will decide whether it’s a viable plan or not.

When creating a business plan for franchise loans, it’s always smart to include the most crucial parts. This includes:

A well-written business loan can go a long way. Take some time to create a business plan that explains your vision and goals. Remember, it’s your key to convincing lenders that your business is worth investing in.

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FAQ

What is a franchise business loan?

A franchise business loan is the financing necessary for a franchise business owner to manage cash flow and operate effectively. Running a business has its benefits, but it can also be costly with all the added fees and overhead expenses. It’s also common for franchisees to experience cash flow shortages.

How do you qualify for a franchise business loan?

The qualifications for franchise financing vary depending on the size and type of financing. For example, to qualify for a business line of credit or bridge loan, the most important factors are cash flow and length of time in business. On the other hand, SBA loans and equipment financing require that the business owner has strong personal credit, positive cash flow, and appropriate collateral.

How long does the application process take for a franchise business loan?

The length of the application process for financing varies depending on the funding program. Lines of credits and bridge loans require limited documentation, and their application process is relatively quick. Funding can be as quick as 24 hours after approval.

Other programs such as SBA loans, asset-based loans, and equipment financing will require a more extensive application process. In most cases, these loans may take around a few weeks to months to get approved.

How would you use a franchise business loan?

Franchisees use business loans to properly manage their cash flow with all the upfront expenses and fees that come along with owning a franchise. There are many operational costs, and without the proper financing in place, many of these businesses cannot operate efficiently.

Fortunately, business loans provide the extra working capital that covers expenses such as equipment, training, payroll, expansion, and more.

Is collateral required for a franchise business loan?

Collateral is necessary for long-term franchise financing options, such as is the case with an SBA loan, equipment loan, and asset-based loan. Typically, financing such as business lines of credit and bridge loans will not require collateral unless it is a significant dollar amount.

What are the different franchise business loan options?

There are a variety of different financing options that franchisees can take advantage of that will help their business.

Business lines of credit and bridge loans are commonly used to handle day-to-day operations, while SBA loans are used to refinance any existing debt as well as being used for the expansion of a business.

Do Franchisers Offer Franchise Loans?

Some franchisers may offer in-house franchise financing for franchisees. The information is usually disclosed in the franchise agreement. The franchise disclosure document is the document that outlines the franchise system and process. The document will also outline the franchise fees, so you must go through the agreement thoroughly with your lawyer.

Like applying for traditional bank loans, the franchisers will review your eligibility. This includes your personal credit rating and financials. While it may seem convenient to apply for financing from the franchisers themselves, shopping for loans from third-party companies may give you better chances of landing excellent loan terms.

Franchise Business Loan

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Franchise Loans for Your Franchise Business

4 Ways to Utilize a Franchise Business Loan

Top 5 Franchise Loan Programs for Your Franchise

How to Apply for Franchise Financing

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