The capital required to buy a franchise business is no joke. The initial investment of franchise fees—plus the typical startup costs that any new business requires—adds up to a substantial sum of cash. These huge upfront costs are exactly why many burgeoning franchise owners access business loans to finance their franchise purchases.
If you’ve decided that taking out a business loan to buy a franchise is the right move for you, you’ve got a lot of solid financing options to consider. When applying, you’ll need to choose the financing option that’s the best fit for your budget, your credit history, and the franchise you’re hoping to purchase.
So that you can find the perfect fit for your needs, here are the details on all of the best loans you can use to buy a franchise:
SBA 7(a) loans
Through SBA lending programs, the Small Business Administration offers partial guarantees for loans provided by certified SBA lenders. As a result of the mitigated risk that this partial guarantee provides, SBA loans are one of the most affordable options for financing a franchise.
Because SBA 7(a) loans offer financing for a wide variety of business expenses, they’re the most common type of SBA loan. If you take out an SBA 7(a) loan to open a franchise, you can use the proceeds for multiple costs that come with the process—think real estate purchases, upfront franchise fees, equipment purchases, and even working capital. Depending on what you use the proceeds for, these loans can be up to $5 million with repayment terms that range from 7-25 years, and interest rates as low as the Market Prime Rate plus 2.25%.
SBA loans are one of the most difficult forms of business financing to qualify for, however. Sure, the partial SBA guarantee makes an SBA loan easier to secure than traditional bank loans. But that’s not saying much.
Before applying, you need to make sure that the franchise you’re planning to open is eligible for funding in the SBA Franchise Directory. The directory lists thousands of options, including Domino’s, Shuckin’ Shack Oyster Bar, and World Gym. Though the SBA doesn’t list many minimum requirements, most SBA lenders will look for good personal credit, especially because you haven’t yet started your business.
SBA CDC/504 loans
On the other hand, if you know you need a loan to purchase the real estate for your franchise—rather than the rights to the franchise itself—then SBA CDC/504 loans might be better suited for those needs. In contrast to SBA 7(a) loans, SBA CDC/504 loans exist for a very specific purpose: Purchasing commercial real estate, giant fixtures, or large pieces of equipment.
These SBA loans consist of three parts: A loan from a bank, a loan from an SBA-approved CDC, and a 10% to 15% down payment from you. These SBA loans can offer as much as $20 million with repayment terms that range from 10-25 years. Again, though, these SBA loans will be more difficult to qualify for, and you’ll need to make sure your chosen franchise is SBA-approved.
Term loans from alternative lenders
If you can’t qualify for an SBA loan for your franchise, you should consider business term loans from alternative lenders. Just like traditional business loans from banks, term loans from alternative lenders offer lump sums of capital that you’ll repay, plus interest, with an agreed-upon repayment schedule.
Unlike traditional business loans, though, term loans will be much easier to qualify for. If you’re working with personal credit that’s less-than-stellar, this might be a more accessible option for you.
This accessibility could mean higher rates, smaller loan amount, shorter repayment terms—or all of the above. Term loans from alternative lenders offer $25,000 to $500,00 with repayment terms of one to five years and interest rates from 7% to 30%. That said, they will fund much faster than SBA loans—think funding within two days rather than the months it might take you to access SBA funding.
Business lines of credit
If you anticipate also needing access to additional financing after you purchase your franchise, consider a business line of credit. This financing option works a lot like a combination between a business credit card and a traditional term loan.
Your business will have access to a credit limit, just as you would with a business credit card. However, in contrast to business credit card spending, whatever you borrow with your business line of credit will be installment debt, which means you’ll pay it back, plus interest, over an agreed upon repayment schedule. As a result, business lines of credit allow you to gradually repay your debt without hurting your personal or business credit score.
Business lines of credit are available through banks and alternative lenders, so the minimum requirements and available terms for this funding option will vary widely. But if you’re searching for flexible financing for you franchise, a business line of credit could be the perfect funding option for you.
ROBS financing
Perhaps you’re sitting on a hefty sum of retirement savings in your 401(k) or IRA. In this case, you could avoid taking on debt by choosing to finance your franchise purchase through ROBS financing. ROBS stands for Rollovers as Business Startups, and it allows you to invest at least $50,000 to start, acquire, or grow a business.
This franchise financing option won’t require you to withdraw retirement funds and incur early withdrawal fees—it merely involves investing your retirement funds into stocks for the business.
Of course, this means you’ll use your retirement funds for something other than your retirement. This is a risk and something you shouldn’t do lightly—talk to your financial advisor before making any decisions.
If you do decide this is the best move, you’ll need to make your franchise entity a C-Corp. As a result, ROBS involves a bit of paperwork and bureaucracy, so it could get confusing. Luckily, organizations like FranFund specialize in helping entrepreneurs like you access their retirement savings to open up a franchise branch.
Internal financing from the franchise
If none of the above franchise financing options seem like a good fit, you’re not out of luck. Many franchises offer internal financing for those interested in opening up a branch. Franchises are constantly coming out with special financing offers for new franchisees, and they’re often remarkably affordable.
Financing your franchise: Final thoughts
Now that you’re familiar with all of the top financing options for buying a franchise, what’s the next move? If you’ve found the best financing fit for your needs, start looking into companies or lenders that offer that financing option. Chances are, there will be more than a few financing providers for you to choose from even after you’ve taken this step.
Look into the details on each, and be sure to apply only if you meet the minimum requirements for a given option. After applying, you’ll be able to compare offers and choose the most affordable financing for your needs.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire.
Loan stock photo by mangostock/Shutterstock
