Getting down to the nitty-gritty of funding a franchise business is important because it eventually determines the type of business you build.
Furthermore, would-be franchisees often realize they have far more options than they’d imagined when they find that they can buy a resale business, secure a bigger region or even multiple regions.
Knowing your funding options also gets you ready to inject the right amount of cash when opportunities knock and you need to grow your bottom line or face situations that need instant funds.
SBA: African Americans Dig into Their Pockets to Fund Franchises
Reports by the Small Business Administration found that 70 percent of black entrepreneurs use personal finances or depend on their families. And though almost 19 percent of white entrepreneurs depended on business loans provided by banks or other alternative lenders, only 15.2% of African-American startup owners did.
Black and Latino entrepreneurs would rather tap into personal credit cards which are a very costly option even compared to what one would get from a business bank loan.
In the light of this statistic, it helps to understand that there are new initiatives and alternative funding options investors can utilize. Let’s discuss your best options and learn more about funding a franchise.
What are Your Loan Options?
According to the SBA, here is a list commercial financing options franchisees often use to fund their business.
- SBA 7A
- SBA 504
- CRE conventional loans
- Merchant Cash Advance
- Non-SBA working capital loans
- Equipment loans
- Development funding
What Do You Need to Qualify for SBA Loans?
To make a purchase through an SBA loan, you must be dealing with an SBA-registered franchise, and be ready to meet the following requirements:
- 10% -15% deposit of the full loan amount.
- Minimum credit score of 660. (Any score from 620 up may qualify with enough justification).
- No bankruptcies.
There are no stipulated minimum years of experience for most industries, but the lender may require 1- 2 years industry experience for certain businesses like hotels.
How Much Should You Borrow
It is advisable to borrow what you need, but do not forget to tap into the benefits of 20%-25% liquidity. SBA loans require10%-15% deposit but the financer will be more willing if they see more liquidity in the form of IRA/401(K), shares, home equity and so on.
Injecting a small percentage in cash, say 10%, in a business with slow returns may lead you to debts.
Merchant Cash Advances Can Fund Your Franchises
You can try MCAs if loans by the SBA do not work for you. Merchant cash advances are available for any business that takes payments through credit cards. The funding option offers a business a lump sum (in advance) and deducts an agreed-on amount from its per-day credit card sales.
You pay back more when business is good and repay less when sales are low. Plus, the repayment is taken away automatically so do you don’t have to worry about settlement.
Final Words
Consider the above options when looking to fund your franchise. For MCAs, you want to be careful with the lender you borrow from. Make sure you confirm their terms and conditions and understand their pricing structure before you enter a deal.