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Franchise Loans 101

When going through the process of purchasing a new franchise, there are several expenses that you may need to get financing for. You should be prepared to be ready to pay an up-front franchisee fee, and then you will need more money to get supplies, and market your business. All of this before you even see a dime of revenue in return. Trying to get a franchise loan is a good way to make sure you can cover all of these initial expenses, and help you keep afloat until you become profitable.

There are two main types of franchise loans available: traditional loans and small business administration loans (SBA). Banks or other financial institutions through their individual programs and criteria, are the ones who offer Traditional loans. The federally-run SBA agency established rules for the SBA loans.

Lenders realize that there is a high failure rate of new businesses within the first two years of operation (approximately 30 percent), so they typically will only fund those businesses they think will have a very good chance of success. Not only do they take that knowledge into account but they also take a very close look at a potential borrower’s credit history, business plan, experience, and collateral into account before they make their decision.

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Conversely, SBA loans can be easier to qualify for, but there are several steps borrowers must take in order to increase their chances of acceptance. A strong business plan will be weighted more heavily than personal experience, and if experience is lacking, having a team of advisors (including a franchise lawyer, accountant, and consultant) will show that you are armed with the experience of franchise professionals in order to succeed. A borrower with a quality team of advisors and strong support system is more likely to be considered for the loan.

In addition, for a SBA loan, the franchise that you are considering to start running must hold up to certain criteria. The franchise must be a for-profit business that is located within the United States, and must earn below $13.5 million in retail sales. The franchise also must follow the human rights laws that disallow discrimination against employees or customers based on age, race, or sex.

My Franchise Law is a website dedicated to connecting those who are existing franchisors, starting a franchise, or buying into a franchise with experienced and qualified franchise lawyers.