Franchise Financing Options

Before you sign on the dotted line of that new franchise, you’ll need to obtain financing for it. The following are the most common sources that are used to finance a franchise business.

Bank Financing
Most people think that getting a loan to start a business is just a matter of talking to a bank. After all, isn’t that what banks do? They figure they’ll explain their reasons for wanting this particular business and outline the projections for how much money the business will make. And then, the banker will loan the money based on this projection. The loan will be secured and paid back from all the assets and profits of the new business.

Unfortunately, it doesn’t work like that. If you walk into any bank and tell them you want a loan to start a business, you won’t get any money unless you can completely collateralize the loan through your own personal assets. In other words, if you have cash, stocks, home equity, and other semi-liquid assets that could easily repay the loan if the business defaults, they’ll probably give you the money.

If you have sufficient personal collateral to secure a loan for the amount you need, especially if it is in your home equity, the easiest and cheapest way to get the loan is to set up a line of credit at the bank for the amount you need.

The Small Business Administration
Let’s assume you’re not financially strong enough to obtain funding from a bank, you’re going to need help from another source. This may include the Small Business Administration (SBA), which provides programs where it will work with lending sources, like banks, to guarantee the repayment of most of a business loan. This is done because the bank will not loan the money without the guarantee. The SBA charges fees to the borrower to offset the risk of making such guarantees.

Keep in mind that the SBA has stringent requirements in relation to security that must be met before it will agree to issue the guarantee. Typically, you’ll need to have your own cash available for at least 30% of the total investment required for the franchise business. You can also expect that any lending source will probably require personal guarantees that effectively will pledge all your assets to protect the loan.

Franchisor Financing Programs
Many franchisors offer programs with selected financial sources to facilitate rapid funding of their franchisees. In this case, they can help walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain that you’ve found the right franchise, is request this information from the franchisor and research your options.