How to Get a Loan for Your Franchise

Preparing to apply for a loan.

Entrepreneurs seeking franchise financing should first conduct research to learn about business loans and the basics. As a franchisee, you should also build and maintain a decent credit score, which includes demonstrating a history of repaying loans on time, starting off small, and using your credit card responsibly. 

You should also organize your documents by establishing accounting and bookkeeping practices to back up your revenue, expenses, debts, and assets. Once your documents are organized, it’s essential to get accurate estimates of the loan amount you need, determine what you can realistically afford, and provide proof of cash flow.

Additionally, you should have a positive net worth and may need to show a personal net worth statement in order to be considered by a franchisor. You may also be required to have a certain amount of liquid assets to cover expenses until the franchise becomes profitable.

To qualify for a franchise loan, it is recommended that you choose a Small Business Association (SBA)-approved franchise, as the application process for such a franchise is more simplified. Borrowers who own B2B franchises can obtain financing using their clients’ invoices, while others may seek “purchase order financing” to pay their suppliers. Some franchisors offer help accessing loans, either through their own loan guidance department or through partnered loan brokers.

How to get a franchise loan.

To obtain a business franchise loan for buying a franchise, take the following steps: 

1. Check your credit score – First, review your credit score and credit report, ensuring that your personal FICO score is above 600 to qualify for the loan. 
2. Gather financial documents – You will need to organize financial documents—including personal and business financial bills and tax returns—to assess how much risk you pose to a lender. 
3. Develop a business plan – Creating a business plan that outlines your roadmap for the franchise helps the lender understand how you will use the funding to become a successful business.
4. Determine collateral – Determining collateral is an essential step for investors wanting to secure a loan. Valuable assets—including but not limited to cash, property, stocks, and vehicles—must be provided as security. The greater the collateral offered, the higher the likelihood that the loan will be approved.
5. Apply for the loan – Once you have prepared all your documentation, submit your loan application to the lender of your choosing. The lender may require additional information, which you should provide as quickly as possible.
6. Wait for approval – Finally, wait for the lender to approve your loan, which may take one to 10 business days, depending on the lender.

Types of franchise financing options.

Following are the different types of loan options available for your business.

Franchisor financing 

Franchisors may assist new franchisees with financing and offer discounts on fees. They may partner with preferred lenders to offer financing or provide it directly. However, this option is not available to everyone, so check the franchise’s website and disclosure document for relevant financing details.

Conventional bank loans.

Banks and credit unions offer competitive loan options for franchises, but strict criteria must be met. You will need excellent credit, strong finances, and years of business experience to qualify for loans with competitive interest rates and repayment terms. Collateral may also be required to secure financing.

SBA loans

The U.S. Small Business Administration’s SBA loans—including the 7(a) and CDC/504 loans—offer franchise financing options that are issued by participating lenders. However, the franchise must be included in the SBA Franchise Directory and meet strict lending criteria to qualify. SBA 7(a) loans are the most common type of SBA loan and are used for various purposes, while SBA CDC/504 loans are administered by certified development companies and can only be used in specific instances, such as equipment, land, and real estate purchases.

Online business loans.

Online business loans offer borrowers the convenience of applying for loans online without visiting a physical bank, with loans available for up to $500,000 or more. Alternative lenders provide a streamlined application process and quick approval decisions, making them an attractive option for small businesses with poor financial histories. Direct alternative lenders like Kabbage and OnDeck, as well as lending marketplaces such as Lendio, offer various loan options.

Business lines of credit. 

This loan option is a flexible financing alternative that allows businesses to borrow up to a certain limit and pay interest only on the amount borrowed. You can use it for various short-term needs, like managing cash flow, purchasing inventory, or covering payroll. Unlike with traditional loans, you can draw funds as needed, and repay them on a weekly or monthly basis.

Certain fees are associated with a business line of credit, such as origination, account maintenance, draw, and inactivity fees. The credit line can be secured or unsecured and is more flexible than long-term loans.

Personal resources

Financing a franchise can involve using personal assets, such as savings accounts, severance packages, home equity, and retirement savings plans. This can be risky and threaten your future financial security. 

Another method is to use Rollovers as Business Startups (ROBS), which allows money withdrawal from retirement savings accounts without penalties, but this carries its own risks and substantial fees. You can also turn to friends and family for loans—if you do this, draft loan documents to separate personal relationships from business dealings.

Deciding on a franchising loan.

Before exploring the types of loans and what’s best for your business, assess your needs by answering key questions, such as:

• How much money is required?
• What is the purpose of the loan?
• How long will it take to pay back?
• What is the current financial standing of the business?
• What outstanding loans does the business have, if any?
• Is a short- or long-term loan needed?

To find the best franchise financing option, you should evaluate your unique needs and consider various factors such as lender requirements, loan size, down payments, interest rates, and the lender’s experience with financing franchises. Be sure to check with your franchisor for any incentives, like reduced fees.