Let’s say you have already made the decision to go into franchising and may even have already selected the particular franchise that will be the best match for your talents, experience, and future aspirations. What is the next step? Well, one of the very next steps is to secure the financing that will fund your new entrepreneurial project so you can get it up and running in as little time as possible.
To open a new franchise location, nearly everyone has to take out some kind of business loan. But how do you know which loan type and amount is the wisest move for your franchise? And where do you go for detailed, reliable advice on how to actually get approved for the loan that you want?
Pinpointing the Amount for Your Business Loan
Based on the specific franchise brand you plan to open, the demands of your chosen industry, and the location where you plan to open your new business, you have likely already calculated (with helpful advice from franchise HQ) the estimated cost of “setting up shop.”
You also need to cover your full first year of business expenses to be on the safe side and maintain sufficient liquid capital to fall back on in case of “emergencies” or unforeseen expenses (which always crop up).
Refer to your business plan and the FDD (franchise disclosure document) to calculate the numbers more precisely, and stack that up against whatever capital, savings, or equity you already have. That will give you the amount of money you need to take out in a business loan for your franchise. You definitely also want to calculate a repayment plan, and factor that into your costs of doing business up until the projected date when the loan will be paid in full.
Selecting the Type of Business Loan for Your Franchise
As for the type of business loan, there are several good options. First, you can use equity on a home loan or 401k if necessary, though business-specific loans will be more ideal. The best option, really, would be to use financing offered by the franchise itself, but this is not always available.
A great option, in many cases, is an SBA (Small Business Administration) loan. These are not government-issued loans but are issued by private banks and other lending entities, which enables them to make loans where “conventional” methods might not result in an approval. Lenders like SBA loans because of the guarantees involved in the event of a default. For example, SBA-7a loans comfort banks with a 75% guarantee upon default. As to term length, SBA loans often range from 7 to 25 years, potentially giving you plenty of time to repay.
However, a few words on the loan interview. You can benefit from the “clout” of the franchise when applying for the business loan, but lenders still like to see you come up with 20% of the start-up costs yourself. And lenders will also look at your personal credit score, business plan, business experience, and assets, before giving the approval.
Help in Selecting & Securing the Right Business Loan
In many cases, despite great acumen in running a business, prospective franchise owners do well to get extra assistance on financial matters like loan applications. You will often save money, time, and effort and avoid needless stress by relying on a well-seasoned team of business loan experts as opposed to taking the risk of making a wrong loan decision with long-lasting consequences.