Are you looking to take advantage of a franchise opportunity but have yet to determine where to obtain a business loan? This article provides the best business loan options to finance your franchise startup.
Like every other business, starting a franchise requires money. This money ranges from the franchise fee to the money needed to lease and set up the business premises and even purchase the opening stock.
While you may have some money for this, you’ll likely need additional funds to carry out your franchise project. Read on to learn about the different business loan types you can use to fund your franchise startup and where you can obtain them.
Types of Business Loans for Franchise Startups
Several loan options to fund your franchise startup include traditional bank loans, equipment financing, personal loans, and small business administration loans.
Finding the right loan option for your franchise startup requires in-depth looking at each loan’s structure. Let’s examine some of them.
Traditional Bank Loans
Traditional bank loans are the most common financing option for business owners. They are typically offered by banks, credit unions, and other financing institutions and are often referred to as “term loans.”
Traditional bank loans give you access to a lump sum to fund your franchise startup. However, the loans come with a preset repayment period, which might start counting from the following month, irrespective of whether you’ve made a profit.
Small Business Administration (SBA) Loans
SBA loans are preferred for most businesses seeking franchise startup loans. They are similar to traditional bank loans, given that banks and credit unions offer them. However, they come with less risk to lenders because the US government backs most SBA loans.
Because of the federal backing, banks and credit unions tend to provide SBA loans with longer repayment terms and lower interest rates to franchisees. With a well-written business plan and a good credit score, accessing SBA loans for your franchise startup is easy, especially if the franchisor is an established enterprise.
Personal Loans
Personal loans can also be great options for starting a franchise business, especially when the funds required are small.
Franchisees with good credit scores who want to avoid putting their properties on the line may resort to personal loans for their franchise startup financing. Because personal loans are unsecured, most lenders offer maximum loan amounts between $50,000 and $100,000.
Equipment Financing
Equipment financing is an ideal option for startup franchises requiring expensive equipment. This form of loan partially or fully covers the costs of the equipment required for the franchise startup, allowing the franchisee to focus on the other costs involved in setting up a franchise.
With this information on the different loan types you can use to fund your franchise startup, you can now easily identify where to get these loans.
Where to Obtain a Business Loan for a Franchise Startup
Banks and credit unions are the first to come to mind when considering where to obtain a business loan for your franchise startup. However, many other sources provide better loan options for franchise startup financing. Here are some of them:
Franchisor Financing
Most established franchisors have organized financing solutions for their franchise businesses. They collaborate with lenders to offer loans to their franchises at reasonable interest rates. Even more, some have a well-established financing model that sees them provide capital, goods, or premises to a franchisee directly from the company’s accounts.
Therefore, when starting a franchise, your first conversation about external financing should be with your franchisor. Business loans from the franchisor or franchisor lender partners usually come with better terms than what you can get.
Banks and Credit Unions
As expected, banks and credit unions are popular options for business loans. They can provide you loans up to any amount you need to start your franchise, but only after assessing your creditworthiness and business viability.
Most banks and credit unions require you to submit your business plans to enable them to determine if you can make enough money from the business to repay the loan. Most banks will likely reject your loan request if your business plan has exaggerated income expectations with poor income generation plans.
Similarly, if you have a bad credit history, most banks and credit unions will either decline your application or offer you loans with high-interest rates.
Small Business Administration
The US Small Business Administration is an excellent source for franchise startup business loans. Here, banks and credit unions offer loans to franchise startups with the backing of the US SBA.
The US government, through the SBA, guarantees to pay up to 85 percent of the loss in any loan default. This is done to encourage business startups among Americans and reduce the risks most lenders face.
However, even with the government guarantee, people with inauspicious business plans and bad credit histories get thoroughly scrutinized before getting a loan.
Online Lenders
If you want to secure a loan to fund your franchise startup quickly, consider getting franchise loans from online lenders.
Online lenders make fewer demands than traditional banks before offering a loan. Even more, they will process your application quicker, making it easy for you to start your franchise at the right time you planned for it.
Most online vendors offer the same loan types as traditional banks and even more. You’ll have options like term loans, equipment financing, business lines of credit, and other varieties of business loans.
However, because of the higher risks they face, online lenders offer their loans at higher interest rates than traditional banks.
Friends and Family
Of course, irrespective of how you see it, loans from family and friends are one of the best finance sources for your franchise startup.
Most importantly, these loans come at lower costs than traditional bank loans. Think about lower or no interests, longer repayment plans, and zero risk of losing property in the event of a default.
However, defaults on this kind of loan can cost you a friendship or result in family disagreements. Therefore, it’s best to draw up repayment plans and handle these loans as though they came from a bank or credit union.
Conclusion
Starting a franchise business is a safer way to venture into entrepreneurship. It offers you the freedom and perks of running your own business, and with the protection and guidance of an established brand, your chances of succeeding are higher.
Taking advantage of one of the business loan options in this article will make it easier to get your business running.
