Starting out is tough!
When you don’t have buckets of money to your name, finding franchise loans to start your business can seem daunting. Though starting a franchise is theoretically less risky than starting a brand from scratch, it’s still tough to find lenders willing to give you a shot.
Here’s 8 sources to investigate to get started.
- Try family and friends
- Ask your franchisor
- Seek out specialty franchise financing companies
- Try your local credit union or community bank
- Apply for an SBA loan
- Use your 401K or IRA
- Leverage credit card teasers
- Consider tapping home equity
1. Try family and friends
Your family and friends want to see you succeed. And, you wouldn’t dare ask them for money unless you were going to pay them back. Family and friends have lent money to budding entrepreneurs in an informal sense ever since, well, forever.
We recognize that it takes a fair amount of chutzpah to hit up your aunt or uncle for money. You need to have a solid plan in place, an understanding how you’ll use their money, and what a repayment schedule will look like. Sort these things out beforehand, and you’ll have an easier time looking someone in the eye and asking them to contribute funds for your franchise.
In fact, we’ve reviewed a lender, Able Lending, that provides a platform for fundraising among family and friends. They also participate in the loan, by up to a 2x on funds raised by family and friends. We think they are a great option for companies who haven’t had luck with community banks or credit unions.
Here’s what their prequalification page looks like. It’s short, and it’s easy to get started.
2. Ask your Franchisor
If anyone stands to point you towards a low-cost loan, it’s your franchisor. As you are probably aware by now, there are specific disclosure requirements that the federal government (specifically, the Federal Trade Commission) asks of companies offering franchising opportunities. You probably saw the Franchise Disclosure Document (FDD) when evaluating franchises. Inside the FDD, pay close attention to Section 10.
As you can see in the above example (page 40 in the document), the franchisor “[does] not offer direct or indirect financing for franchisees.” Yet, right after mentioning that, they provide details on some of their financing options!
They will allow for payment of their franchise fee in installations before construction begins for a new hotel. And, in the subsequent paragraph, they mention providing incentives for developing and constructing hotels, like a loan you don’t have to pay back if you own the franchise for 20 years.
If you’ve got an FDD that makes no sense, we’d be happy to put you in touch with an advisor to walk you through your options.
3. Seek out specialty franchise financing companies
There are several alternative lenders that focus on franchisees. Apple Pie Capital and Boefly are both ‘marketplace’ lenders. What that means to you, the borrower, is largely irrelevant. They are willing to work folks folks across the risk spectrum, with loans starting from $100K up. Once you prequalify, you can get funded within a couple of weeks.
Here’s what Apple Pie’s prequalification form looks like:
4. Try your local credit union or community bank
Local credit unions and community banks offer low rates and great service for first time franchisees. And, they’re not just doing it for goodwill. A small community bank called State Bank of Texas focuses on lending to hotel and motel owners. This little bank also has historically had best-in-class profitability.
Credit Unions and community banks aren’t known for the nicest of websites. But, they typically have lower fees and more flexible underwriting criteria when it comes to loans. You’ll stand a better chance getting approved when you approach them as a franchisee of a big brand. We have reviewed a few credit unions and community banks that work with franchisees. Check them out here.
5. Apply for an SBA loan
There are certain franchises that allow for a smoother (read: faster) SBA loan application process than others. The list is extensive, and can be found on the SBA.gov website.
A point of explanation: The Small Business Administration doesn’t lend money themselves. Rather, they guarantee certain loan products that banks and credit unions issue. One of those products, the 7(a) loan, is the most common SBA loan. It’s interest rate is in the single digits, and it has generous payment terms. The first step is to find a bank or credit union you want to work with, and work with an advisor to explore SBA programs they offfer.
6. Use your 401K or IRA
This strategy involves first setting up a 401k for your corporation – and then rolling over your existing retirement money into this 401k, and then investing the money into your business.
In other words, it’s best to seek the advice of someone who knows what they’re doing, like a financial planner or tax expert. Because this involves a fair amount of work from professionals, expect to pay a few thousand dollars in fees, plus annual expenses, to make a strategy like this work. And, we would consider this only after exhausting possibilities from friends and family, banks and tapping your home equity.
7. Leverage credit card teasers
Consider using credit cards to finance your business when you need less than $50,000, and the bank has said no to you for a traditional loan.
It seems scary, but it’s a well-trodden path for new companies to fund initial expenditure using credit cards, especially if time is of the essense. And, credit cards come with a host of other benefits, such as sign-up bonuses, rewards points, and 0 % intro APRs.
8. Consider tapping home equity
So, let’s get the biggest negative out of the way. By using your home as collateral, you’re putting your business and your home at risk. If you don’t pay the loan back, they take your house. And, closing costs can be expensive. So, consider doing this when you need major money.
On the other hand, the interest you pay on either a home equity loan or line of credit is almost as low as that of a traditional bank loan, and are certainly less expensive than what alternative lenders might charge. And, you can use this as a ‘startup’ loan – few restrictions on your time in business.
As we mentioned, there are two products:
- Home equity loan: A one-time lump sum loan that is repaid monthly at a fixed rate, just like a regular mortgage. This makes sense for major one time expenses.
- Home equity line of credit (HELOC): Like a credit card, you have access to a set amount each month, and repay it during what’s called a ‘draw’ period. It makes sense to have a HELOC to manage ongoing expenses and cash crunches.