3 Tips for Financing a Franchise

If you’re thinking about financing the purchase of a franchise but aren’t sure where to start, there are a few things you should know. A franchise can be an excellent business opportunity with plenty of brand recognition and room for growth, but securing funding for it can also work a bit differently than for other business ventures. Fortunately, there are a few simple steps that can guide you through the process so you can secure a great loan. Take a look.

1. Look to Traditional Bank Lenders

When looking for franchise financing, the first place many business owners go is commercial banks, which are traditionally major business lenders. It’s possible to get a great bank loan, but you’ll need a strong history of handling credit to do so. You’ll also want to be prepared to provide extra documentation such as tax returns, personal financial statements and proof of your source of down payment. If you’ve been in business for a while, you’ll have even better odds of securing a traditional commercial loan. Be prepared to put in about 20% of the amount needed as a down payment up front.

2. Consider an SBA Loan

If a 20% down payment is more than you can afford to put in at the moment, or if you have shaky credit history or haven’t been in business long, the next stop on your journey to franchise financing is a loan guaranteed by the Small Business Administration, or SBA. The government backing generally makes these loans less risky, and as long as you’re credit-worthy and will be able to repay the loan from your cash flow, they’re an excellent option. One drawback, however, is that interest rates vary and sometimes fluctuate, so check up on interest rate details before signing agreements. What might seem like a low interest rate at first could increase later on.

3. Understand Drawbacks to Tapping Retirement Plans

If you’re having a hard time securing financing, it may be tempting to tap into your retirement accounts for capital. Before you go this route, make sure you understand any tax implications of making early withdrawals. While this option may provide you with some quick funds, keep in mind that if your franchise goes under, your retirement account will be gone.

Running a franchise is an exciting business venture, but sometimes, securing franchise financing can be a headache. Thankfully, following a few simple steps can help make it easy. Consider these options when you’re looking for funding and you’re sure to secure the right loan for your company.

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