Opening a franchise comes with many perks not all startup companies can enjoy. Running a franchise gives you the whole entrepreneurial experience without the uncertainty that comes with being a new business owner. The franchisor will sell you rights to use the product, brand, and business name. In other words, you’re using a tried and tested business model. But it’s not all rainbows and sunshine when franchising a business. For one, you won’t have much liberty when it comes to the location, product variation, and design. Additionally, you’ll have to fend for yourself financially, which means you may have to apply for franchise business loans.
Franchising a business is a great opportunity but it’s not as easy as they make out to be, especially if you don’t have enough funding. If you’re in need of working capital, check out the top three franchise business loans.
1. SBA Loans
SBA loans are one of the most sought-after financing solutions available for small business owners today. The U.S. Small Business Association created SBA loans specifically for small businesses that need funding. SBA loans are partially guaranteed by the government (up to 85%) and funded by SBA-approved banks and alternative lenders.
This type of loan functions similarly to traditional terms loans people get from banks or alternative lenders. The only difference is that the guarantee from the SBA reduces the risk to lenders. This means that lenders are incentivized to loan money to small business owners and charge lower interest rates and longer repayment terms.
The downside of SBA loans is that it’s harder to qualify compared to other types of loans. If you have a good credit score, healthy cash flow, and established business history, you can try your luck. Keep in mind that the application process can take weeks or months and the standards are stringent. Be sure to assess your chances of approval before you spend much time applying for one.
2. Traditional Bank Loans
Banks are the go-to option for many entrepreneurs looking to apply for a small business loan. However, this doesn’t mean that it’s easy to qualify for one. Fortunately, many banks and credit unions favor franchises because of proven track record. According to a study by the Small Business Administration, around 37.8% of new franchise businesses are funded by traditional bank loans, compared to the 23.1% of non-franchise startups.
before you apply for a bank loan, make sure that your credit score is good and that you have the necessary documents – personal financial statement, profit and loss statements, tax returns, etc., as well as a comprehensive business plan. Aside from qualifying for a loan, you also want to receive better terms. So, even though banks don’t have a problem offering to finance to franchises, strive to get better terms by surpassing the qualifications set by the lender. But just like SBA loans, it may take time before you can receive funding.
3. Alternative or Online Business Loans
Alternative lenders, or also known as alternative online lenders, offer different types of loan products, from term loans, equipment loans, or ass-based loans to purchase order financing and SBA loans. The loans offered by alternative lenders can cover every type of business need, like working capital, unforeseen expenses, equipment purchases, and advertising expenses.
Online lenders are a great option if you need immediate access to funding. Unlike traditional loans, your application process can be done online and the entire application is usually processed within hours. This means that you’ll receive the cash in as little as 24 to 48 hours, depending on the lender you’re working with. If you don’t qualify for traditional banks loans or SBA loans, you’ll likely get funding form alternative lenders.
However, the accessibility, speed, and convenience alternative lenders offer come at a price. Be prepared to pay higher interest rated compared to the ones offered by banks loans. Make sure to assess your capabilities and your business to see if it’s worth the added cost.
Franchise Business Loans to Fund Your Franchise
Being a franchise owner is a great way to dip your toes into entrepreneurship without much risk. You’ll enter into business knowing that you have a proven business model and a large corporation to back you up. Just make sure you have sufficient capital to back you up.
SMB Compass offers franchise business loans for entrepreneurs in the United States. Our finance experts are available to answer your questions and concerns. Call us for a no-obligation chat today at (888) 853-8922.