Franchise financing can be a frustrating process without knowing your options. Apart from your local bank, these options fall under 3 main categories:
1. SBA Financing
The U.S. Small Business Administration (SBA) guarantees loans for private banks/lenders. Programs include the popular 7(a) loan for up to $100,000.
2. Non-SBA and Specialty Franchise Financing
There are commercial lenders that specialize in franchise financing through equipment leases and structured term loans. There is also the ERSOP program, using your 401k or IRA as start-up capital without penalties, taxes or distributions.
3. The Franchisor
Many franchise companies either offer financial assistance themselves or help franchisees finds a bank or other lender. Most have a list of “preferred lenders”.
Whether it’s SBA or non-SBA franchise financing, anywhere from 15% to 30% of the total capital need can be required of the borrower. Franchise start-up costs vary wildly across franchises, so this could be anywhere from $20,000 to $200,000. A borrower may need to refinance their personal property or liquidate stocks, bonds, IRAs, 401k, etc.
If possible it would be best if an individual could obtain the credit they need using business credit instead of personal credit, so that personal assets are not at a full risk. Also banks are more apt to loan more money to a business than to an individual.