Banks are more willing to provide financing to franchise businesses than startups for three main reasons: lower management risk since franchisees don't design all aspects of the business themselves, access to historical franchise performance data, and higher chances of SBA loan guarantees for franchises. SBA loans provide lower interest rates than conventional loans but have higher closing costs. Franchise owners typically need 30% of startup funds from their own sources like cash or investments.

1. Franchise Financing
Guide

2. Why It’s Easier to get
Financing for franchises

3. There are many
pros and cons..
…To buying a franchise instead of
starting a business from scratch,
which we detail here. One major
benefit of buying a franchise, that
is not covered in the article just
mentioned, is financing.

4. Banks are much more comfortable loaning
to franchises for three main reasons
1. There is less management risk associated with a franchise.
2. There is rich historical data that the bank can draw upon about the
success of franchises.
3. The Small Business Administration (SBA) is much more likely to
guarantee a loan to a franchise than many other types of startups.

5. Management Risk
The fact that the business owner has less
areas where they have to make critical
decisions (The business owner will not
have to make critical decisions regarding
product mix, suppliers, pricing, and store
design) decreases the management risk
for the new business.

6. Historical Success
Of Franchises
There is the Uniform Franchise Disclosure Document
(FDD) which all franchisors are required to publish.
In addition to the FDD, banks can see the repayment
history of SBA guaranteed loans by the franchisor.

7. SBA Loan Guarantee
The SBA is much more likely to guarantee
a loan to a franchise than many other
startup. The SBA doesn’t actually make
loans. Instead, they guarantee loans made
by financial institutions. While the SBA
doesn’t guarantee 100% of the value of
the loan, they do usually guarantee 75%
of 7(a) loans.

8. What Are Your Chances of Getting
A Loan To Buy A Franchise?

9. Depends on Franchise
Quality and Credit Quality
Of the individual getting the loan. I asked
about what credit score a person would
need to apply, Geoff Seiber of FranFund
answered that a credit quality was more
than just a credit score. It involves looking
at their current assets and debts, their
history, and their personal life.

10. After receiving this answer, I phrased the
question differently
“ What credit score would tend to disqualify a
person from getting a loan?” He answered that
it would be hard for person with a score below
640 to get a loan. In his view, credit scores
between 680 – 720 were the “gray area”
where some banks might see the credit score
as a factor weighing against giving a loan.

11. In addition to a business
owner’s credit quality
The franchisor matters. Some banks
have had really positive experiences
working with certain chains, and have
made a decision to aggressively offer
credit to new franchises

12. What Are the loan terms you can expect?

13. Just because banks are
willing to loan money
To start a franchise, doesn’t mean that
they don’t want the franchise owner to
have a significant investment in business.
Typically, this means putting up 30% of
the money needed to launch the
franchise.

14. Here is how banks are likely to
view the different ways you can
come upwith the cash:
1. Selling Investments Or Using Cash On Hand
(Good)
2. Taking A Loan From A Tax Advantaged Account
Like An IRA (Not Good)

15. Here is how banks are likely to
view the different ways you can
come upwith the cash:
3. Doing An IRA Rollover For Business Startup
(Good)
4. Taking A Home Equity Line of Credit (Not good)
5. Getting A Friend or Family Member To Buy Equity
In the Company (Good)

16. How can taking a loan from an IRA
be Bad, but an IRA Rollover for
Business Startups be Fine?

17. The basic idea
Is that the banks and the SBA do not want
the funds provided by the business owner
to have to be paid back. While a business
owner may consider the money in an IRA
“their money”, it’s not quite that simple
from a legal perspective.

18. The basic idea
While taking a loan from an IRA is not
considered good, using the IRA to
purchase stock in a company is fine. A
Rollover For A Business Startup (ROBS)
enables such a purchase to happen. The
franchise owner is borrowing money from
a bank that needs to be paid back.
You can learn more about the different ways to
come up with the cash you need for a loan here.

19. Why SBA Guaranteed Loans Are Attractive To New Franchise Owners

20. In theory
SBA guarantees are only supposed
to be for loans that a bank would not
approve if the SBA guarantee did not
exist. By definition, it should be
easier to be approved for an SBA
loan than a normal bank loan.

21. A conventional start-up
bank loan
Might carry an interest rate of prime rate
plus 7-8% for a seven year loan. When this
article was written (September 2014), the
rate would likely be around 10-11%, as
prime rate is 3.25%.

22. For an SBA guaranteed
7(A) loan
There are strict rules regarding the interest
rate that can be charged. For a 7 year loan
of more than $50,000, the maximum rate is
prime rate plus 2.75%, which would be 6%
when this article was written.

23. Closing Costs Are Higher For SBA Loans

24. One downside of using an SBA loan
Closing costs on conventional bank
loans can be much lower than on SBA
guaranteed loans. Closing costs
typically include the cost of the SBA
Guarantee. The closing costs on a SBA
loan are in the ballpark of 4%, versus
conventional loan closing costs of 1%.

25. Does your franchise even qualify
for an SBA loan? The sba loan
franchise registry

26. The SBA Franchise Registry
Is a list of franchisors that the SBA in the
past has decided that their franchisees are
in fact independent businesses. However,
this list doesn’t guarantee a loan. If the
SBA doesn’t view the franchise
owner as operating an independent
business, they will not provide a loan.

27. Beyond the sba
guaranteed loan

28. Many first time franchise owners
Start-off with an SBA guaranteed loan, they
often re-finance it with a conventional loan
when they start expanding to multiple
franchise locations. There are two reasons
why this happens:

29. 1.
The interest rate differential
between SBA guaranteed loans
radically shrinks as the owner
develops a track record of
generating consistent cash flow
from the franchise.

30. 2.
SBA loans typically require the
business owner to provide
personal guarantees and pledge
collateral, regardless of the size
of the business.

31. Learn More About SBA Guaranteed Loans

32. Has a wealth of resources for those interested in learning more about
7(a) loans. For those that want to learn more about the interest rates
and fees, click here. If you are looking for guidance on how to fill out the
paperwork, click here.

33. Has a wealth of resources for those interested in learning more about
7(a) loans. For those that want to learn more about the interest rates
and fees, click here. If you are looking for guidance on how to fill out the
paperwork, click here.

34. Has a wealth of resources for those interested in learning more about
7(a) loans. For those that want to learn more about the interest rates
and fees, click here. If you are looking for guidance on how to fill out the
paperwork, click here.

35. Has a wealth of resources for those interested in learning more about
7(a) loans. For those that want to learn more about the interest rates
and fees, click here. If you are looking for guidance on how to fill out the
paperwork, click here.