How to Obtain a Franchise Loan Correctly
Considering your franchise options starts with this. Before considering the more than 3000 franchise options, this work must be completed. I advise using CreditKarma.com as a starting point to check your current credit score. After seven days, you can still cancel without being charged; in fact, it’s free and trustworthy (see their FAQ).
In general, there are five factors that affect credit scores: the amount of credit you owe, your payment history, the length of your credit history, and new credit. The better your credit score, which can range from 300 to 845, the lower your payments will typically be. Keep in mind that higher scores generally mean less debt.
Next, let’s talk about the people who actually provide startup and business loans. First, the SBA 7a program only guarantees a portion of the loans made; no money is actually loaned under this program. $5K to $5 million in loans are available with terms of 5–10 years and a prime rate of +2.75%. It is highly unlikely that anyone will receive 100% financing; collateral will be determined by credit worthiness and loan amount requested. To ensure that the franchisor complies with all SBA lending requirements, the SBA will also review and closely examine them. Franchise models that demand strict controls of the franchisees have received a negative response from the SBA. The following financing choice for your company might be a home equity loan with the use of the house as security. The advantages include low costs, quick turnaround, and low interest rates. In this case, the lender determines how much they will lend by multiplying the loan to value ratio—which is the sum of your debts less your equity—by roughly 85%.
Next are unsecured loans with higher interest rates and collateral involving equipment. CDs, stocks, bonds, and other securities (aside from those found in retirement plans) may be used as collateral for security-backed lending. Here, loans up to 70% of the value of the security may be obtained with a typically low interest rate and a prompt processing time.
A 401K-IRA Rollover plan, where more franchises are launched with retirement funds than SBA loans, is a very viable funding alternative. No matter your credit score, you can expect a turnaround time of 10 to 20 business days. The best part about these instruments is that the government takes on up to 40% of the risk, free from taxes, penalties, and debt! This choice is set up more like an investment than a loan because there are no loan payments to make (earn money faster). With this funding strategy, which won’t affect the debt ratio or credit rating, we have seen higher success rates. You can take a salary from the funds, and there are built-in tax advantages and exit strategies. This item was developed to fill the funding gap between SBA funding and the previously mentioned funding alternatives. To determine their funding factors, each client will need a unique analysis.
Franchise lending experts with extensive experience should pay close attention to this complicated issue. My best recommendation is to start the process as soon as possible so you can do your research and make an educated financial decision.
