By now, potential franchisees have realized one glaring reality of the franchise sector --it's a highly detailed form of business ownership.
They've most likely done hours of research, read pages of legal documents, scoured the internet looking for the perfect franchise match and made a commitment to sign. Now comes the big question: "How will I pay for this business venture?"
Like the franchise industry itself, funding can be a complex area to understand. There are US Small Business Administration loans, conventional bank loans, crowdfunding, a variety of credit lines and a number of other ways to generate the capital needed to fund a franchise. How can new business owners possibly know which one is right for them?
For many in the franchise industry, franchisors and franchisees alike, the expansion and development of the SBA has been a significant driver in the changing financial landscape.
The SBA 7(a) loan program is the most commonly used for franchise funding, with about 10 percent of loans going to franchisees. It is also one of the few programs available to new franchisees that select their franchise from the Franchise Registry. 7(a) loans are issued by a bank or other qualified lender, most commonly between $250,000 and $500,000, and are partially guaranteed against default by the government.
This is a major advantage for franchisees by incenting lenders to extend loans to startups and small businesses that would otherwise not meet their underwriting requirements. Typically, an SBA loan provides approximately 70 percent to 85 percent of the business capital needed, with the remainder being met through the franchisee's equity investment. The proceeds from an SBA loan can be used for startup expenses, working capital, inventory, supplies, equipment and more. Franchisees who are considering an SBA loan should be comfortable with extending a personal guarantee and collateralizing the loan.
CONVENTIONAL BANK LOANS
Many traditional banks and financial institutions have embraced franchise lending, in part because of the reputation franchise companies offer. That's especially the case for well-known and highly established systems. The more well known a franchise is, the better chance the franchisee will be offered favorable lending options.
Conventional bank loans are most commonly available to existing franchise locations related to resales or growth capital. A strong history of profitability is important. In general, the...