If you’re like most new franchise owners, you’re thinking about how to finance your purchase properly. After all, very few owners have enough capital to cover both the upfront and ongoing costs right from their wallet.
[Related: 5 Checklist Items for the First-Time Franchise Buyer]
To help you consider a financing plan that fits you, we’ve put together a simple buyer’s guide to financing-–especially for the first-time franchisee. If you have additional questions or are looking for a low-cost franchising opportunity yourself, talk to us today about starting a franchise of your very own.
1. Look for commercial lenders
While it’s not always easy, commercial banks regularly fund franchises that can show a plan for success in a local market. Aside from this, however, the biggest deciding factor for banks is your credit rating. You’ll need to offer a comprehensive loan package with a personal financial statement, copies for tax returns for the past three years and a verified source for the down payment you intend to make.
[Related: How to Open a Franchise With Little Money]
While brand names and size may play into a bank’s decision to lend, the key factor is the ability to do well in a variety of areas and economic conditions. In other words, can the business do well anywhere and survive a poor economy?
If you’re looking for a recession-proof franchise opportunity, you may want to give The Groutsmith some thought. Read our other article on how our system is designed to be successful no matter what the economy looks like.
Keep in mind that banks are very reluctant to give out unsecured loans without collateral no matter how stellar your credit is. Always be prepared to put your own money toward up to 20% of the amount needed.
[Related: The 5 Steps to Getting a Franchise Loan]
Going through a commercial lender is typically easier for those who already have a good relationship with the bank through previous experiences. If this doesn’t sound like you, think about option two:
2. SBA loans
Loans from the U.S. Small Business Administration (SBA) come partially guaranteed by the government, so they’re less risky. The typical SBA loan is the 7(a), which is issued by banks and qualified lenders.
Here’s how these loans work:
- SBA loans of 5 to 6-year maturities give you working capital in the short term.
- Real estate loans from the SBA typically run for 20 years or more.
- Roughly ten percent of these loans are given specifically to franchisees, which are usually $250k-$500k in size.
- Borrowers have to be creditworthy and usually, it’s up to you to contribute some equity.
- Borrowers are expected to repay the loan from the franchise’s cash flow.
If you’re a veteran, you’ll definitely want to consider the third financing option available:
3. Patriot Express loans
Aside from SBA loans, there’s another government lending program, particularly for veterans. The Patriot Express is managed through the Department of Veterans Affairs and typically boasts fast approval times for loans up to $500k for active-duty military personnel making the transition back to civilian life. These loans also carry the lowest SBA rates.
[Related: 4 Reasons a Grout and Tile Franchise is the Perfect Choice for Vets]
Other financing options
If a loan isn’t possible, it may make more sense to tap into a 401(k) or some other kind of retirement fund. Since early withdrawals are taxed, however, you may want to think about establishing a C corporation to own the business through.
This way, you can roll money over from your retirement account into a profit sharing plan and put that money toward the franchise itself. Always consult with a financial professional before taking any kind of risk with your retirement funds.
Interested in learning more about our low-cost franchise opportunity? Click here to get in touch with us for the details.
Looking to learn what it’s like to own a Groutsmith franchise? Get a first-hand look from eight franchisees in our free Q&A guide. Click below to download.
