Starting a business takes a ton of time and effort, as well as tangible resources like…well…money. A common question that eager potential franchisees ask is “do banks give loans to start a business like a franchise?” Don’t worry, we’ll answer this question and more in this brief guide to small business loans for potential franchisees.
Can You Get a Bank Loan for a New Business Like a Franchise?
Yes, you can. However, it depends on the lender and your qualifications. After all, starting a new business is risky! Data from the U.S. Bureau of Labor Statistics backs this up, showing that over 50% of new businesses fail during the first five years. When you’re searching for new business funding, it’s important to recognize that some lenders won’t take a chance on an unproven concept.
Some factors that may help you be more appealing as a loan prospect are:
- Good credit scores, both personal and business (more on this in a moment)
- A for-profit business in an eligible industry (industries like real estate investing or gambling may be excluded)
- A solid business plan
- A well thought-out loan proposal
- Collateral (for example, stocks or real estate)
Here’s the great news: many lenders love to back franchises! Because a franchise comes with a trusted brand and a proven track record, some lenders actually prefer loaning to new franchisees.
Can I Get a Business Loan With a 500 Credit Score?
It depends on the lender and your other qualifications. However, like most financial transactions, higher credit scores are typically more favorable. According to NerdWallet, you’ll probably be able to secure a loan with a credit score of 700 or above while scores under 600 may make it more dicey.
What Are the Easiest Loans To Get Approved for When Starting a Franchise?
There really isn’t such a thing as an “easiest loan” because every lender is different and your unique qualifications have to be factored in. However, when starting a franchise, SBA 7(a) loans are a popular option. The Small Business Administration (SBA) works with lenders to provide government-backed loans that typically have more favorable interest rates and repayment terms than traditional banks.
What Is an SBA Loan, and How Does It Work?
One of the most important things to remember is that the SBA does not actually lend money directly. Instead, this government agency works with specific lenders, providing them a guarantee that if the business owner defaults, then the SBA will cover a percentage of what is owed.
There are three types of SBA loans: 7(a) loans, 504 loans, and microloans. Each type of SBA loan has its own requirements and purpose.
- SBA 7(a) loans are the SBA’s “bread and butter”—the primary way they provide financial assistance to small businesses. These can be used for both start-ups and established businesses.
- SBA 504 loans are only available to U.S.-based for-profit businesses that have a tangible net worth of less than $15 million and an average net income of less than $5 million for the two years prior to applying (and after federal income taxes). This type of loan is obviously geared towards existing businesses.
- SBA microloans are designed to provide small loans of up to $50,000 to existing small businesses.
As a new franchisee, if you decide to go for an SBA option, you’ll want to apply for a 7(a) loan since 504 loans and microloans have more limitations.
What Are 7(a) SBA Loan Requirements for Franchises?
SBA 7(a) loans have general eligibility requirements and one that is specific for franchises. The general requirements are that businesses must:
- Operate for profit
- Be engaged in, or propose to do business in, the U.S. or its territories
- Have reasonable owner equity to invest
- Use alternative financial resources, including personal assets, before seeking financial assistance
As a franchisee, your business is eligible except “in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.” Check the franchise agreement to make sure that the concept you’re considering meets these requirements!
What Are Other Funding Options for Starting a Franchise?
Don’t get discouraged! There are plenty of ways to fund your dream of becoming a franchise owner that aren’t bank loans. In fact, you may find success with one or more of these options:
- Franchisor Financing – Depending on the franchise you’re interested in, the franchisor may have funding options like deferred payment plans or loan programs.
- A Business Partner (or Partners!) – Having a business partner can help spread out the financial impact of starting a franchise. Just make sure you do your due diligence and have firm agreements in place to protect yourself.
- Crowdsourcing – As they say, many hands make light work—and lessen the burden on your bank account. This method may be especially useful if you’re trying to open a franchise in a location that lacks resources.
- Small Business Grants – There may be resources available through local non-profits and state or federal government agencies that can help you fund your franchise. Make sure to ask about eligibility requirements!
Find (and Fund!) Your Franchise Dream at FranchiseGator.com
If you’re ready to get started on your franchise journey, be sure to check out our concepts at FranchiseGator.com. You’ll find tons of resources, like a list of the top franchises each year and a comprehensive blog with more information about becoming a franchisee. Interested in knowing what funding options you qualify for before you apply? Check out our free assessment tool to find out what funding you may be eligible for. We’re excited to see you get the funding you need to start your franchise journey!