Small Business Loans
Being your own boss and owning your own franchise is a dream that many people have—but can feel impossible to achieve, especially if you don’t have the liquid assets to invest immediately. You may be one of those people asking, “how do I get funding to start a franchise?” Don’t worry, here at Franchise Gator we know all the ins and outs of franchises. We’ve put together this guide to help you understand how to get a loan to start a business and answer frequently asked questions about franchise financing. Let’s get started!
What Are Small Business Loans?
Small business loans give you access to capital (also known as “money that is available to use”) that you can invest in your business. You can use a small business loan for many different reasons, like to cover start-up costs, expand your business, purchase equipment, buy inventory, or even acquire real estate. Every loan has a different set of requirements (which we’ll talk about in a moment), so it’s important to do your research to understand what you’re signing up for. There are a few important terms to know before you start shopping around:
- Down payment – Some small business loans require you to put a down payment on the loan, usually a small percentage of the entire loan amount.
- Loan terms – These are the specific conditions about your loan and will include details like the interest rate and how long your repayment period will be.
- Financial covenant – These are conditions that may be added to your loan. For example, a bank might ask you to maintain current financial records and deliver them to the bank at regular intervals.
- Personal guarantee – If your business assets aren’t able to cover loan payments, a personal guarantee means that the lender can seize your personal assets for repayment.
- Fixed or floating interest - A fixed interest rate is one that stays the same for the entire duration of the loan. Floating interest rates change periodically based on current market rates.
- Collateral - This is an asset that you promise to the lender if you cannot repay the loan. If you default, the collateral is turned over to the lender as payment. This is usually things like equipment or real estate.
What Are the Most Common Types of Small Business Loans?
Most people will think of a conventional loan or term loans from a bank when they hear “small business loan.” Term loans generally involve the bank giving the borrower a lump payment that is then repaid over a set period of time with an agreed-upon interest rate. The terms and conditions depend on the lender. They can have either fixed or floating interest rates, and will probably include some financial covenants. Larger loans may require a down payment, but smaller loans may only need collateral and a good credit score to secure.
Are There Any Government Small Business Loans?
Yes, there are. You may be able to get a loan through the Small Business Administration (SBA), a government agency that exists to support small businesses and facilitate government-backed business loans. There are three main categories, known as 7(a) loans, 504 loans, and microloans.
This program is the main way that the SBA provides financial assistance to small businesses. Your options are: Standard 7(a), 7(a) Small Loan, SBA Express, Export Express, Export Working Capital, International Trade, Preferred Lenders, Veterans Advantage, and CAPLines. It’s important to remember that the SBA does not actually lend you the money themselves. Instead, the SBA works with specific lenders and guarantees to that lender that the SBA will pay a percentage if the business owner defaults on the loan. Each of the 7(a) loans has its own terms and conditions, some of which are set by the SBA and some that can be negotiated with SBA-approved lenders.
This program is only available to for-profit companies in the United States with a tangible net worth of less than $15 million and an average net income of less than $5 million after federal income taxes for the two years preceding your application. It provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation. For example, you can use a 504 loan to purchase a new building, but you cannot use it to pay off your debts.
This program provides smaller loans (up to $50,000) through SBA funding intermediaries. They are meant to help existing small businesses expand their operations by covering things like inventory, furniture, or equipment. Every intermediary has its own lending and credit requirements.
Are There Any Small Business Loans for Women and Other Minority Groups?
Yes, you may be able to find small business loans that are designated specifically for minority groups. For example, the SBA also has the 8(a) Business Development program that is only open to small businesses that are at least 51% owned and controlled by U.S. citizens who are socially and economically disadvantaged.
What Is the Most Useful Type of Loan for a Small Business?
It depends on what you’re wanting to do. If you’re looking to start a business, you’ll need a loan that will allow you to do that. Some lenders won’t give loans to start-ups while others specialize in it. If you want to expand or grow your business, look for a loan that covers equipment like the 504 loan or a microloan.
Can I Get a Loan To Buy a Franchise?
Yes, you absolutely can! In fact, some lenders prefer loaning to new franchisees because they know that the franchise comes with a trusted brand and a proven business model. You can definitely seek a loan from a bank or pursue an SBA loan to buy your franchise. You can also get a loan to expand your current store or to purchase another location if you’re ready to grow your business.
What Are Business Loan Requirements?
Each lender will have its own requirements when it comes to who they will lend money to. After all, they’re taking on a risk every time they lend money—there’s always a possibility that they won’t be repaid. In general, you may need:
- Good personal and business credit scores
- A business that is bringing in revenue
- An established business (usually for two years or more)
- A for-profit business in an eligible industry (sometimes industries like real estate investing or gambling are excluded)
- A business plan
- A loan proposal
- Business and financial documentation
Of course these will vary depending on the lender. Let’s look at SBA 7(a) loans, for example. In order to qualify, you must:
- Operate a for profit business
- Be considered a small business, as defined by SBA
- Be engaged in, or propose to do business in, the United States or its possessions
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking financial assistance
- Be able to demonstrate a need for a loan
- Use the funds for a sound business purpose
- Not be delinquent on any existing debt obligations to the U.S. government
Getting a loan for a new business can be tricky, but remember: franchises already have a proven track record, which can make it much easier to secure financing.
Is There Any Difference Between Business Loans and Franchise Loans?
No, not really. You can usually get a business loan to open or expand a franchise. Sometimes you may see the term “franchise loan” used interchangeably with “business loan.” Other times the term “franchise loan” refers to the fact that some franchisors offer franchise loans. Just like other loans, these franchise loan requirements will vary depending on the franchisor's terms and conditions.
What Disqualifies You From Getting a Business Loan for a Franchise?
There isn’t much that will disqualify you unless the lender has specifically excluded franchises or you have unique circumstances that don’t fit the eligibility criteria. However, if you’re interested in SBA loans, it’s important to note that franchises are not eligible if the franchisor retains the power to control operations to such an extent that it could be interpreted as an employment contract (in other words, the franchisor could be considered the actual employer rather than the franchisee). Most franchise agreements are set up to give the franchisee that level of control, but it’s important to check the Franchise Disclosure Document (FDD) to make sure.
What Score Do You Need To Get a Small Business Loan?
There really aren’t specific numbers for your credit score in order to qualify for a small business loan, but like most financial transactions, the higher your credit score, the better. According to NerdWallet, a credit score of 700 or above is ideal for securing a loan while those with scores under 600 may struggle to secure funding.
Is a Small Business Loan Hard To Get?
It can be if you aren’t in a strong financial position. You can improve your chances by making sure that you are building credit, saving money for a down payment or for collateral, putting together a strong business plan, and making sure that all of your documents are accurate and in order. If you meet the eligibility criteria, you shouldn’t have to worry about not getting a loan. If you’re not sure where you stand, we offer a free assessment so you can see what you qualify for before you even apply.
How Do I Get a Loan for a Franchise?
First, you need to figure out what franchise you are interested in starting. Unless you have a specific industry in mind, it may be helpful to browse the investment requirements. On Franchise Gator, you’ll find that we have franchises with costs ranging from under $10,000 all the way up to $1,000,000. As you might expect, securing a loan for $10k is much different than attempting to get one for a million dollars.
Let’s say you’ve settled on Tutoring Works, an opportunity for you to start a local tutoring business. In order to purchase this franchise, you'll need to have at least $20,000 in liquid capital, and you can expect to make a total investment of $17,900 - $20,000. You’ll want to request free information about this franchise and get the process started.
Once you have the info about the franchise, complete the quick and easy assessment for funding on our website. We’ll collect the full picture of your current financial situation and then match you to the right loan solution. Once matched, you’ll work with the lender to provide all the information they need, submit your application, and come to an agreement.
If you would rather do this on your own, that’s fine too! Simply find a lender that you would like to work with, provide them with the details about your chosen franchise, and fill out their application. You may have questions, but your lender and your franchisor have been through this process before and can help guide you.
Is It Ok To Get a Loan To Start a Business?
Absolutely! Obviously, it’s great if you have thousands of dollars in liquid assets lying around that you can invest in a franchise, but not everyone is privileged enough to have that financial situation. Starting a business is expensive, and loans can be a good tool for achieving your dream of being a small business owner. Luckily, most franchises are more cost-effective and lower risk than the typical start-up since there is a proven and established business model already in place.
How Much Can I Borrow for a Franchise?
It depends on the lender and your financial picture. If the franchise you’re investing in has a high profit margin and a proven track record of success, you may be willing to go for a higher loan amount. However, if your credit score is slightly lower or if there are other factors that impact your ability to apply for a loan, you may want to stick with a lower loan amount. There is no perfect answer to this question because everyone’s situation is so unique. Talk with your financial advisors, your franchisor, and your lender to understand how much you can (and should) take on in a small business loan.
What Are the Most Likely Sources of Funding for a Franchise?
There are so many different ways to fund your dream! In addition to the loan options we’ve already discussed, you can explore:
- Franchisor Financing - Most franchisors have resources for you. They may have deferred payment plans or loan programs that you can participate in.
- A Business Partner (or Partners!) - Bringing on a business partner who can help split the costs (and the work!) may be the solution. Just make sure you have firm agreements that detail how the responsibilities and equity are split. You may also look into a venture capitalist or an angel investor to provide the funds.
- Crowdsourcing - The power of many people contributing a little bit shouldn’t be overlooked. If you’re trying to bring a franchise into an area that lacks resources, people may be excited to help make this possible. With many different crowdfunding platforms available, this can be a viable option if traditional loans or other financing doesn’t work out.
Franchise Gator: Make Your Franchise Dream a Reality!
Are you ready to be a small business owner? Are you looking for an exciting opportunity and a vibrant career? It’s time to find your franchise and get started. There are so many funding options available and we’re confident that with hard work and dedication, you can open your own franchise (even if you don’t have thousands of dollars saved up). Explore our listings today and take the first step towards fulfilling your dream.
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As of January 25, 2021:
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