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March 30, 2022
Starting any business requires a significant amount of up-front funding as well as working capital to at least see you through the early stages of building the business. The same goes for starting a franchise, with some of these initial costs being even clearer, such as the cost of buying a franchise and franchise fees on top of the inventory and equipment needed to start working.
A typical startup cost for a franchise will be between $100,000 to $300,000, so unless you have that much in personal savings to commit to your enterprise, most likely you will need credit or a franchise loan from somewhere. But where should you start looking for lines of credit, and what will financial institutions need from you to secure the loan? Don’t worry. For anyone wondering how to get a franchise loan, we’ll take a look at what you need to know.
How to Get a Franchise Loan: Types of Loan
When it comes to business financing, small business owners actually have a number of options for getting the necessary capital together. The first step in understanding how to get a franchise loan is assessing the loan options available to you and then researching how much they will cost in terms of interest rates and whether you are likely to meet the requirements for the loan. We’ll start by looking at the different kinds of financing options available to potential franchise owners.
– Standard Commercial Loans: These are the most common type of small business loans and involve getting in touch with a bank or other financial institution and telling them what you need in terms of funding. They will ask you to provide proof of your financial statements, credit history, and ability to pay back the loan. If you meet their requirements, you will discuss the length of the loan and the interest rate, after which, if you’re happy, you can sign your loan agreement and draw down the money. The process of researching, submitting documents, and getting approval can take anywhere from weeks to several months, so start this search well ahead of time.
– Small Business Association (SBA) Loans: SBA loans are at least partially guaranteed by the SBA, meaning financial institutions are much more likely to give them as up to 75% of the money they give out will be repaid no matter what. The SBA loan requirements for franchise owners can be more stringent than other types of loans and can take a while to get approved. Still, they are beneficial for people who may not have the major credit history of former small business owners.
– Home Equity or 401K Loan: These small business loans involve borrowing the money with some kind of asset, such as your house or 401K as collateral. This means that if you fail to repay the loan, the bank can seek whatever amount remains from this asset.
– Franchisor Loans: A common means of franchise financing is to borrow the money from the franchisor themselves, which is a service offered by many franchisors such as Gold’s Gym, UPS Stores, and Screenmobile Franchise. One of the benefits of a franchisor loan is that you’re already sharing the same financial information with them, and all payments can be worked out together, with the loan strengthening your ties together.
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– Family and Friends: When investigating how to get a franchise loan, you’ll find that many new franchises actually start outside of the financial system and look to their close circle around them for help first. Money can be a cause of problems between family and friends, but drawing up proper paperwork, signing contracts, and putting a clear repayment plan in place can overcome these, giving people access to finance where they might otherwise not be eligible.
– Alternative Lenders: These can seem like good options as they generally have lower eligibility requirements and can provide the money faster than standard bank loans. However, be warned, alternative lenders mostly charge interest rates far above average, and saddling your business with that kind of debt from the outset can make it impossible to ever turn a profit. They can be useful to cover short-term cashflow issues but are not feasible for making large long-term investments.
How to Get a Franchise Loan: Presenting Your Case
No matter who you go to for finance, even family and friends, you’re going to have to make a case about how the business will work and why you’re good for the money. So, a major part of how to get a franchise loan is preparing and presenting your business idea. Here are some of the core elements of making a good case for yourself.
– Use Figures and Data: No one knows exactly what will happen with your new business but doing research can help you figure out what your min/max revenue per month will look like. Taking in costs and fees you should be able to work out how much profit you’ll be making, which demonstrates how you’ll be paying the loan back. It’s good business sense to do this for yourself anyway, and it also shows any potential lender that you know what you’re getting into.
– Outline Plan for the Money: Along with the financial health of your franchise in general, it’s also helpful to detail exactly where the money you’re borrowing will go. For example, if you’re borrowing to upgrade a premises or vehicle you can outline exactly how that investment will lead to even greater returns on the money.
– Don’t Be Afraid to Ask for Help: Applying for a loan and talking with financial institutions can be a tough process as it’s not something people do on a regular basis. If you have any contacts who have started a small business recently or, on the other side, work for a financial institution, reach out to them for tips on how to get a franchise loan.
– Be Clear About Contracts: Both your franchise contract and any lending contract will have a lot of terms and conditions about what will happen if certain other events happen (such as wanting to leave the franchise or not paying back the loan). Knowing where you stand in terms of these contracts can help keep things clear in your plans about what your obligations and options are in the future.
Conclusion
Not many people have the spare cash lying around to invest in starting a new franchise, meaning that most have to go looking for some kind of financing. Understanding how to get a franchise loan revolves around knowing your options of where to go and how to present the best case for yourself.
At Screenmobile, we try to make things as easy as possible for new franchisees, and so our low overheads and zero premises costs make it a lot easier to start your franchise with minimum financing needs. These are just part of the reason why we’ve got the highest franchise renewal rate in the industry at 99.5%. To find out more about starting a Screenmobile franchise, you can read more about what we offer here or get in touch with us here
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