What Is Franchise Loan?
Franchise loans are loans typically taken up for the purchasing of a franchise license by a franchisee from a franchisor, in return for annual licensing payments and capital. They help in providing startup for the franchisee and most franchisees usually settle when starting up their franchise.
How does Franchise Loan Work?
Just like other loans, commercial banks fund a lot of franchise loans although, franchisors sometimes provide loans plans for their franchisees. A lot of franchise loans are long term loans and require solid collateral, as well as existing business relationship and good credit.
The Advantages and Disadvantages of Franchise Loan
Franchise loans are essential to the startup, growth and maintenance of franchise businesses, without it the entire franchising system would fail, they also give people a chance of financial independence as the cost of starting up a franchise is high. As much as they are wonderful, the flaw to this loans is, they are unfortunately hard to qualify for as you have to face an ocean of paperwork that reduces your chances of qualification.
Types of Franchise Loans
Being that the launch of each franchise does not have an existing revenue, starting up a franchise business often similar to a startup business. Just as seen in start-up businesses, lending options could be limited, but it still available. Here are some options obtainable:
Franchise Line Of Credit
For owners looking for unsecured franchise line of credit, there are options available. With a business credit score of at least 620, you could obtain a franchise line of credit ranging up to $450,000 with a 0% APR for twelve months without collateral and at minimum cost from most lenders.
SBA Franchise Loans
These are the most common ways for small scale businesses to get financial aids to provide capital to franchise businesses. SBA loans protect banks as the government pays 85% of the total loans if the franchisee errs. They provide up to $5,000,000 in funding for a span of 3-25 years with an interest rate of 8 to 12 percent and collateral is required.
Asset Based Financing
This is available for already existing franchises looking for working capital. They put the franchises or owner’s real estate up for asset-based lenders to collateralize the property in exchange for up to 90% of its equity value.
What are the Qualifications for Franchise Loans?
Now we know the option available, let’s talk about who exactly qualifies for these loans. To qualify for a franchise loan, a business must have been in business for 2 years and have two tax returns showing a business profit. It must have adequate financial strength to the amount requested, a personal credit score above 690 for the owner outside collateral and/or a solid business credit score track record.
The Bottom Line
Finally, if you wish to apply for a loan; all private and public banks offer this loan, just ensure you have a good credit score, a strong franchisor, a good business plan and solid collateral.