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Top Franchise Loans Options & Tips for Qualifying

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Lantern

Lantern

Updated August 13, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
As the COVID-19 pandemic continues, many small businesses are seeking help with managing cash flow, payroll, and business expenses. If you are a small business owner in need of support, there is help available. Learn more about the CARES Act enacted by Congress in 2020, which provides supportive measures to help small business owners like you navigate these challenging times.Starting a franchise business comes with a number of unique considerations that may affect your franchise financing choices. Buying and starting a franchise often requires a significant upfront investment related to franchising fees and resources that are in addition to the typical costs of running a business. That’s why it’s important to understand what your franchising loan options are, how they differ, and which ones are aligned with your business needs. If you’re getting ready to launch your franchise business, continue reading to learn how to get a loan for a franchise, including the different types, how to apply, and more. 

What Are Franchising Loans?

A franchise loan is used to pay for fees associated with purchasing a franchise or franchise rights from a parent company, or franchisor. In exchange, you get permission to sell products or services under the franchisor’s name. Purchasing a franchise can be a great way to start a business because you get to partner with a well-established brand, which can help kickstart your own business success. While you have rights to use the franchise name, you are subject to their policies about the brand such as site choice, design, and products. You are also responsible for franchise startup capital.Turning to a traditional bank loan is often the first choice because they typically offer the lower interest rates and favorable loan terms. But it may be more difficult to qualify for a bank loan, leaving potential business owners to search for other franchise lenders that allow use of funds towards franchise business costs. 

Typical Costs of Starting a Franchise

When it comes to determining how much money you need to start a business, there are number of factors that can contribute to the overall costs: 
  • Space used to conduct business: Will it be home-based or a commercial space?
  • Equipment and inventory
  • Insurance
  • Employee training
  • Business licensing and legal fees
  • Marketing expenses (ad budgets, signage, digital campaigns)
In addition to these startup costs, franchisors typically charge a franchise fee that is paid upfront and gives you license to own and operate the business under the proprietary terms and systems used by that franchisor. The fees vary greatly depending on the franchise, but typically range between $20,000 to $50,000. It’s important to remember that the upfront costs (office space, inventory, equipment) are separate from the franchise fee. So, the actual cost for buying into the franchise and getting it started could be fairly high. When researching business loans for a franchise, make sure to consider the entire upfront investment, not just the franchise fee.

Marketing Fees

After you get the franchise started, the franchisor may also charge ongoing fees for marketing and royalties. Since franchisors are spending money to advertise their brand, they often require a monthly marketing fee to help cover those costs. The marketing fee is typically based on a percentage of your franchise’s monthly revenue. If your monthly revenue is $40,000 and the franchisor charges a 2% marketing fee, you’ll owe the franchisor $800 a month. Multiply that by 12 months in the year and you can expect to pay $9,600 annually.

Royalties

Franchise royalty fees drive profits for the franchisor and help fund with expenses related to the continued growth of the franchise as a whole. While you pay the initial franchise fee, royalties help fund the ongoing support provided by the franchisor and give you the right to maintain your role as a franchisee. Royalties may help cover the cost of:
  • Marketing plans
  • Business strategy
  • Administrative costs
  • Recruitment
  • Consultants 
Like marketing fees, royalties are often collected on a monthly basis, but can also be collected quarterly depending on the franchisor. Royalties are based on the amount of revenue your franchise earns and typically range from 4% to 12%, so make sure to calculate them into your forecasts and budget. 

What Is a Franchise Disclosure Document (FDD)?

The FDD is a legal document that franchisors give to prospective franchisees in the U.S., which contains 23 disclosure sections that address such topics as:
  • Information about the franchisor
  • Costs to open a franchise business with that franchisor, including all fees
  • Legal obligations for both the franchisor and franchisee
  • Statistics on other franchises within the company
  • Franchise financial information
  • Franchisor funding options
  • Information about assistance and training provided by franchisor
  • Restrictions places on products and services
This document serves to inform franchisees before they make a final decision about investing in a franchise business and may help them determine if they’re able to secure franchising loans congruent with the financial obligations required by the franchisor.  

Types of Franchising Loans

As with opening any business, there are many factors to consider with a franchise, including how you’ll secure financing to help build a successful business. To better understand your options, the following sections will break down common franchise financing options.

Franchisor Loan

What is it?A franchisor loan is one that is offered from the franchisor and designed for their specific franchise needs. These types of franchising loans can be in partnership with lending institutions or come directly from the franchising corporation itself. Why choose it?Great for first-time franchisees who don’t want the hassle of trying to get funding from other types of lenders. A franchisor loan acts covers all franchising needs, including financing for equipment and startup resources. Franchisor financing aligns with the unique needs of its franchisees and can offer funding accordingly. Keep in mind:If you qualify for loans from other types of lenders, compare interest rates and terms between your franchisor and the lenders to ensure you’re getting the most affordable funding for your franchise.  

SBA Loan

What is it?SBA loans are those backed by the U.S. Small Business Administration (SBA) and offered by SBA-approved lending partners. They are popular small business loans for franchises because they typically offer favorable loan rates and terms.Why choose it?Franchisees with good credit and reputable business history may be good candidates for an SBA loan. The SBA has various loan programs to choose from depending on the amount of capital needed and what the loan is used for, including: 
  • SBA 504
  • SBA 7(a)
  • SBA Express Loans, which have an application response turnaround time of 36 hours.
Keep in mind:SBA loans typically have stringent qualifications and the application and approval process can also take longer than other lenders.Additionally, your franchise has to be approved and listed in the SBA’s Franchise Directory for qualification. 

Online Loan

What is it?Online business loans are a type of alternative business loan offered by lenders outside of a traditional bank or credit union. Why choose it?Types of franchise loans vary from lender to lender, but online loans typically have a faster application and approval process than a traditional bank loan, which could make them a good option for franchisees who need fast funding. There are even online lenders and marketplaces that specialize in franchising loans, such as BoeFly. Keep in mind:Loans from online lenders may have higher interest rates than other types of loans. You also don’t get the same in-person interaction that you’d get from a traditional banking institution. 

Traditional Bank Loan

What is it?Franchise loans from a traditional bank typically come in the form of a short- or long-term business loan that’s paid back in installments. The bank offers franchisees a lump sum of money up front, which is repaid with interest over a set term determined by the lender. Why choose it?Traditional bank loans typically have favorable interest rates and loan terms for well-qualified franchisees with good credit and a solid business plan. Keep in mind:Traditional lenders often have more stringent eligibility requirements than alternative lenders, and it may be more difficult to qualify for a franchise loan. Be prepared to submit documentation for the bank to review before approval. Some banks may also require collateral for the loan. 

Business Line of Credit

What is it?A business line of credit (LOC) is a revolving or non-revolving short-term business loan that gives business owners access to capital up to an established limit. The funds may be used for short-term business expenses like inventory, working capital, repairs, or marketing. Similar to a credit card, the business owner only pays interest on what they’ve borrowed from the credit limit. Why choose it?A business line of credit for franchisees can be a quick way to access short-term funding for day-to-day business needs without having to apply and qualify for a long-term bank loan. This may be particularly useful for restaurant franchises or other businesses that are affected by seasonality.Keep in mind:Where a traditional, long-term franchise loan from a bank typically has a fixed interest rate,  business lines of credit may have more unpredictable, variable interest rates. They are also usually secured (i.e. require collateral). 

Equipment Loan

What is it?Equipment loans can be used to purchase franchise business-related equipment like machinery. While not specifically franchise loans, they nevertheless may be a good source of startup franchise capital for businesses that require specific types of high-priced equipment.   Why choose it?Equipment loans can be useful for franchises or if you need to buy or upgrade equipment and have a shortage of cash flow. You can avoid tapping into valuable savings to pay for equipment and may be able to get favorable interest rates and terms with good credit (and other key financial indicators that will vary by lender). Keep in mind:If you don’t have collateral to offer, equipment loans may be a good option. The equipment itself acts as collateral for the franchise loan and you may be able to get up to 100% financing for the equipment but be sure to check with your lender regarding down payment, if needed. 

Microloan

What is it?Business loans that are $50,000 or less are often known as microloans. Traditional banks typically do not grant smaller loans to businesses, so microloans are a useful way for new franchises to receive necessary funding without needing to qualify for a larger business loan. Microloan lenders may have different programs that provide loans to all small businesses, or only offer loans to specific types of businesses like those from underserved communities, veterans, or female entrepreneurs.   Why choose it?For franchisees who only need a small amount of financing, microloans provide access to cash that can be used towards various business expenses. SBA microloans are also available and may be an option for franchise financing with bad credit (or limited credit).Keep in mind:Qualification may be easier due to smaller loan amounts, but interest rates may be higher than other types of loans. Check with your lender to confirm interest rates and compare with other options. 

Peer-to-Peer Lending

What is it?Peer-to-peer business lending (P2P) is a popular type of alternative lending in which borrowers and investors are matched based on specific metrics such as credit scores, business needs, and even social media activity.P2P is facilitated by lending platforms that help borrowers and investors find one another. These platforms show rates and terms along with borrowers’ level of risk, then facilitate the money transfer and monthly payments.Why choose it?P2P lending offers a quick online experience that generally makes it simple for borrowers to manage their account without needing to use a bank to service the loan. Keep in mind:It may be helpful to search for P2P lenders who specialize in franchising loans as they will best understand the unique needs of your business.

5 Tips on Finding a Franchising Loan

Follow these five tips to help you prepare for the franchise loan application process:1. Write a business plan: Shows lenders that you are prepared to manage a franchise business and may help with application and approval process.2. Research franchise lenders: Get to know the pros and cons of different types of business lenders and which ones are suited for franchise financing.3. Ask the franchisor if they offer financing: Financing through the franchisor may make the process of starting your franchise simpler. They can direct franchisees to financing options through pre-selected lenders or programs.4. Know costs involved with starting a franchise: This includes the total investment to start, including the franchise fee and startup costs, in addition to royalties and marketing fees.5. Understand your financial situation: Get personal and business credit scores, calculate your projected business revenues, and what assets you have available. Knowing your financial outlook will help you determine which franchise loan is best matched with your qualifications. 

Applying for a Franchise Loan

1. Determine costs for starting a franchise: Franchise startup capital is similar to starting any new business with the addition of franchise fees. Make sure to account for the total investment to start a franchise, including royalty and marketing fees that may need to be paid once your business starts making revenue. Also consider costs like insurance, legal fees, inventory, equipment, and labor needs that may affect the amount of capital you apply for.2. Know your qualifications as a borrower: Gain an understanding of typical eligibility requirements from franchise lenders and if you meet them. Consider factors like:
  • Credit score
  • Collateral
  • Down payment
  • Any prior relationship with banks
  • Business history
3. Choose your franchise loan: Based on your qualifications, research and choose the type of loan that aligns with your unique business needs. Consider how the following franchise loan characteristics might affect your budget, restrictions, and goals: 
  • Length of the loan
  • Interest rates
  • Loan amount
  • How you’ll use the funds
4. Compare lenders: After determining qualifications and loan types, you can compare business lenders who meet your needs.5. Gather the necessary documentation: Have supporting documents ready before applying. These may include your 
  • Business plan
  • Financial history
  • Credit scores
  • Bank information
  • Identifying information
  • Franchise information. 
6. Submit your application: Only submit to lenders you feel confident about and ask if the application will reflect as a soft or hard pull on your credit report. Keep in mind that hard credit pulls can affect your credit score and too many in a short period of time may raise concerns for potential lenders.

Lenders Who Offer Franchise Loans

Curious about lenders who offer franchise financing? This sampling of lenders came from the Google search query “Best franchise financing lenders”:All information was accurate as of 4/14/21.

Alternatives to Franchising Loans

Additional financing options for your small business, whether a franchise or other type of startup, may include:
  • Crowdfunding: Raise capital from a collective of sources like family, friends, and individual investors. Borrowers can leverage the power of social media and crowdfunding websites to help raise funds. 
  • Restaurant loans: Serve the specific needs related to starting, renovating, or expanding a restaurant business. 
  • Commercial real estate loans: Loans granted to business entities (individual or group) for a commercial property that is solely for business use.

Conclusion

There are unique financial considerations when opening a franchise and financing available in a variety of forms. Franchising loans may be found from your franchisor or a bank. But if you’re looking for an alternative online lender, look no further than the Lantern by SoFi marketplace.  Lantern is proud to be your source for finding franchise loans and other types of small business loans to meet your business needs. By filling out one simple online form, you get access to reputable lenders that are ready to help you launch a successful franchise.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20079

About the Author

Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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