Becoming a franchise owner can be a great way to sink your teeth into an industry with little or no experience. The beauty of a franchise is that the majority of the challenging work is already done for you, so you can focus on the bottom line — making a profit. Most franchisors will offer advertising, training, location selection, accounting, human resources, and technical support. Additionally, many franchisors offer an exclusive territory to a franchisee. This exclusive allows for easy expansion to own multiple locations.
Another reason to consider opening a franchise is the bountiful financing options available. You can find financing from a bank or credit union, Small Business Association (SBA), alternative lender, or from the franchisors themselves. You can finance a majority of the initial set-up fees. However, be prepared to pay for a few of them beforehand. Oftentimes, you will need to pay the franchise fee upfront, although some franchisors allow this fee to be paid in installments.
Bank & Credit Unions
A franchise loan from a bank can be tricky to get, even if you have excellent credit. You will have better luck if you have an established relationship with the bank or solid industry experience. The bank will require good personal credit, a deposit, and collateral. Oftentimes, borrowers will need to put a 20% cash deposit down on the loan. In some cases, the bank may require additional collateral such as a home or other valuable asset. Thus, unsecured bank loans are relatively uncommon. Banks will also prefer to finance a well-known brand that has a solid reputation and multiple locations.
Small Business Association (SBA)
If you do not qualify for a bank loan, you may consider seeking a SBA loan. The government guarantees a portion of the SBA loan, which reduces the risk. This can be a good option for someone who may not have stellar credit or have a lot of collateral. However, the SBA loan application process and approval time can take several months. It’s not an ideal loan if you’re eager and ready to open a business.
It is also important to note that the SBA recently streamlined the eligibility process. This went into effect on 1/1/17. The changes require a lender to:
1) Obtain a copy of the SBA Addendum to the Franchise Agreement
2) Identify the franchise in the SBA database
An alternative lender is an option if you want financing fast, however, it comes with a steep price. These loans are considered high-risk loans, and the fees and interest rates are usually high. This can be a good loan for a single-location, first-time franchisee. It may also be a good option for folks who have less than perfect credit. We suggest that you try to obtain traditional financing first, and if that fails, then consider using an alternative lender. The good news is that you can always refinance the loan to get a better rate after you establish a good payment history.
Some franchisors offer financing directly while others have partnerships with certain lenders. These loans will have very similar requirements as loans from a bank, credit union, or SBA. A misconception about these loans is that many people think they offer better rates. This may not be the case, as oftentimes other lenders can offer lower financial rates. Before you choose a lender, you should get an idea of what loan rates you qualify for by shopping and comparing loans.
Ready to get started? Check out the top 10 ranking franchises in 2017:
1 – 7-Eleven Inc.
2 – McDonald’s
3 – Dunkin’ Donuts
4 – The UPS Store
6 – Dairy Queen
9 – Sport Clips
10 – RE/MAX LLC