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Article - Creative Franchise Financing 1

Creative Franchise Financing in a Credit-Challenged World

You can be your own boss, own a franchise, and achieve your dreams for less than you think.

Part 1: The Business Loan: Your Capital, Collateral, and Your Credit Score

The credit landscape isn't the lush place it used to be. Rather than an oasis, it's more like a desert. Since banks have tightened the purse strings, securing a business loan to buy a franchise takes a lot more work, and a lot more perseverance, to navigate the rough terrain. Preparation and creativity are essential.

If you want to finance your dream to be your own boss, you need to know three things: your capital, your collateral, and your credit score: 

  1. Capital. Banks require substantial investment of capital from your own resources, usually 30 to 50 percent of the start-up costs. This may come from your personal savings, 401k, family loans, etc. Learn about these and other sources in part two of this article. 
     
  2. Collateral. The bank will expect you to commit considerable collateral – at least 50 percent of the loan amount. Beyond your home and car, other possessions that can be considered collateral include boats or other luxury items (second homes or cars), as well as stocks, savings and other retirement accounts. For example, if start-up costs are $250,000, and you have $100,000 cash, you'll need a loan of $150,000, for which you will need $75,000 in collateral. 
     
  3. Credit Score. A decent credit score doesn't hurt either -- aim for a score of at least 720. If your credit score is lower than that, consider talking to a legitimate credit counseling service. Suze Orman and Clark Howard both have articles and comments about credit scores and how to raise them.

Prepare for a long and tedious loan application. Take the time to be thorough up front and you'll avoid being blindsided by a sandstorm later.

Now you're ready – partner with a bank that caters to small or start-up businesses. But don't just saunter in to your neighborhood bank and expect to meet with a loan officer. Do your research, call ahead, and make an appointment. Bankers are happy to answer questions about loaning you money.

If you don't have enough collateral for your preferred bank, another option is working with a bank backed by an SBA (Small Business Administration) loan guarantee. Many franchisors have a streamlined review process for SBA-backed loans. That means the SBA has already reviewed the franchise agreements of these companies so you and your bank don't have to. On FranchisesForSale.com, these Franchise companies are easy to find, just look for the Franchise Registry logo.

The SBA has several types of loan programs, including “504 loans” for purchasing equipment and/or commercial real estate, and “7(a) loans” for general operating expenses such as real estate, equipment, inventory, business acquisition, etc. Click here to see the SBA registry.  

If you can secure a non-SBA backed loan (i.e., a bank loan), go that route first. There will be less paperwork. Some banks may prefer it that way anyway. 

The business loan is only one part of the owning-a-franchise finance puzzle. See Part 2: Getting Creative – People want to help you succeed, so ask them, or Part 3: Let's Do the Numbers