Line of Credit for Franchises

Opening a franchise can be an exciting way to own your own business, but it also requires a significant upfront investment. Franchise financing allows entrepreneurs to fund the startup costs of a new franchise location through loans tailored to this type of business.

One option many prospective franchisees consider is a franchise line of credit, which provides access to capital on an as-needed basis. In this comprehensive guide, we’ll explore popular franchise financing options, what it takes to qualify, how to apply for funding, and tips for comparing lending products to find the best franchise line of credit for your business.

Financing Options for Franchises

Before applying for a loan, it’s important to understand the types of financing available to franchise buyers. Common options include:

Commercial Bank Loans

Banks offer term loans or lines of credit that can fund 80-90% of startup costs. Approval requires good credit, collateral, and for established banks to lend to proven franchise models.

SBA Loans

The two most popular Small Business Administration loan programs for franchises are the SBA 7(a) loan which offers up to $5 million for most business purposes, and the SBA CDC/504 loan for major assets like real estate. These government-guaranteed loans make lending franchise applicants less risky.

Alternative Online Lenders

Online alternative lenders provide faster, more accessible business financing. But typically at higher rates and shorter repayment terms than SBA loans. Useful to bridge gaps banks can’t fill.

Franchisor Financing

Some franchisors themselves help new franchisees obtain lending to make buying a location more affordable. This can include preferred lending partnerships, incentives like discounted fees, or direct lending programs.

Other Options

Additional options like 401(k) business financing, securities-backed lines of credit, equipment financing, and hard money loans may provide capital if the above products are unavailable. However, these tend to be more costly forms of financing.

Qualifying for Franchise Financing

Meeting eligibility requirements is key to securing loans for your franchise purchase, including:

• Positive Personal Net Worth: Lenders want to see your assets exceed liabilities. Newer franchise systems may require candidates to have $500k+ net worth.
• Available Liquid Assets: Banks usually require 10-30% as a down payment, so franchise buyers will need available funds for that and working capital until profitability.
• FICO Score Of At Least 600: Applicants should aim for 680+, check their credit report, and fix errors to improve their profile.
• Financial History Documentation: Have tax returns, financial statements, bank records, and all paperwork granting the franchise license ready for lenders.
• Collateral: Banks and the SBA require franchise owners to personally guarantee and pledge assets worth more than the loan value to get approved.

How To Get an SBA or Bank Franchise Loan

Franchise financing can take 30-90 days to secure. Here are steps loan applicants should take:

1. Talk To Your Franchisor First

See if they offer direct lending programs or relationships with banks active in SBA lending. If not, they can refer experienced lenders.

2. Make Sure Your Franchise Qualifies for SBA Financing

Not all franchises meet the SBA’s requirements. Consult their Franchise Registry or ask lenders about a franchise’s eligibility.

3. Choose an SBA Lender

Consider banks you already have accounts with first. Weigh factors like experience with franchise lending, application requirements, customer service, rates and terms.

4. Gather Required Documents

That includes personal financial statements and tax returns, resumes, franchise agreements, projections and a business plan.

5. Apply and Get Ready To Supply More Info

Be ready to promptly provide follow-up documents. Lenders will review and verify application details in depth prior to any approval.

6. Await Loan Decision

It takes 1-3 weeks to get SBA loan approval and several more to fund and finalize the loan agreement. Stay engaged in the process with your lender until completed.

Evaluating Franchise Line of Credit Lenders

With all financing, it is smart to compare multiple lenders to find the best rates/terms. Consider the following when evaluating franchise line of credit providers:

• Loan Amounts Available: Make sure lenders provide enough capital to cover startup costs not financed elsewhere. SBA caps lines at $5 million but most max out under $250k.
• Interest Rates and Fees: Compare APRs across banks and alternative lenders, plus origination/admin fees. Always model loan costs against your projected cash flows.
• Time In Business and Revenue Requirements: Finance companies can require anywhere from one to five years operating history. Choose options you qualify for now.
• Credit Score Minimums: Interest rates improve above 700 FICO but scores as low as 600 may work with the right lender. Know your credit profile.
• Franchise Experience: Seek out banks and direct lenders experienced in financing new franchise locations. They best understand the models.
• Discounts and Perks: Check if franchisors offer incentives like waived royalty fees or equipment co-purchasing that reduces overall financing needed.

The Takeaway

Opening a franchise with financing allows entrepreneurs to launch or expand without large pools of personal capital. An informed borrowing strategy is best, so do your due diligence, start applying early, and consult professionals like accountants, lawyers, or financial advisors with franchise expertise whenever you have questions. While the franchise loan process involves rigor, coming fully prepared will set your new business up for success.

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Meow's partner banks can offer:

• $100K - $5M loans
• Use of proceeds includes new units, acquisitions, refinances, and recapitalizations
• Subject to terms and conditions, credit approval, as well as ongoing due diligence