How to Get a Franchise Loan
Opening a franchise is an exciting move, but franchise financing can be tough to navigate. This is what you need to know when you’re ready to get your loan.
Like any business venture, you shouldn’t jump into franchising without doing your homework. Research the brand carefully, and talk to other franchisees to understand what is expected of you and what you can expect to gain from the commitment. The brand will give you a franchise disclosure document, which you should study closely, but the company is not required to disclose certain pieces of information to you. The FDD may not have specifics about startup costs and goals, so speaking with current franchisees is a wise move. In addition to understanding what owning a franchise will entail, make sure to market yourself to the brand. Have a clear marketing plan, as well as an explanation of your management skills. The brand as well as potential lenders will want to see your resume.
Know Your Options
Franchise financing most often comes from a Small Business Administration loan. The SBA guarantees the lending bank a percent of your loan, making banks more willing to lend to risky borrowers. While this is the avenue many people take when seeking a franchise loan, you could also use equity from a 401(k) or home loan if needed. Certain franchises sell property and even inventory to new franchisees directly. No matter how you go about securing a loan, it is always beneficial to have good credit, liquid assets, and valuable goods to put up as collateral.
Start your loan applications at trusted institutions, such as national and local business lenders, and your own bank. A lender that has experience in franchise financing will usually give you the best experience. Be wary of online sources that claim to connect you to a lender for free. They are often interested in selling your information, leading you on a wild goose chase of disreputable sites. Also be aware that lenders may do a hard pull of your credit when you apply for a loan, which negatively affects your score. Lenders need your permission to take this action, but it is a good reason to be selective when applying for a loan; apply to a few strategic institutions, rather than to anything you come across. These steps will give you the best results when you’re ready to secure a franchise loan and start a new chapter in business.