Buying a franchise takes a lot of the guesswork out of starting a business. Using a franchise financing option is a way to get the funds to make it happen.
Purchasing a franchise can be a good way to own a business without starting a business. Existing franchises are usually already branded. So as a franchise owner, it won’t be your job to promote a new business. Instead, you will promote a new location for an already successful business. Before that, though, you will need to buy the franchise. Franchise funding can provide you with the funds to make that happen.
There are number of different types of franchise funding options, but the SBA 7(a) loan is likely your best option if you can qualify for it. SBA loans tend to have lower interest rates than other types of loans, even when compared to traditional loans from banks or credit unions. This is because SBA loans are a kind of government loan. That doesn’t mean the government is actually giving you the money. Rather, they guarantee a certain portion of the loan (up to 85-percent for loans up to $150,000, and 75-percent for loans more than $150,000). That guarantee means less risk for the lender, which translates to a lower interest rate for you.
The SBA 7(a) has a maximum loan amount of $5 million. There is no minimum loan amount. The loan term can be up to 25 years.
Generally, SBA loans offer a lower interest rate than similar small business funding options not backed by a government guarantee. You should remember, though, that not all franchise funding options are backed by the SBA. So, this advantage does not apply to all franchise funding options.
One of the major disadvantages of franchise funding is that your provider may require you to pledge collateral. For SBA 7(a) financing, the value of the collateral doesn’t have to equal the value of the loan, as long as it is determined that you have pledged all of your available business and personal assets as collateral. That’s good for your odds of approval, but it also means that you could lose everything if you default.
There are a few questions you should consider before buying a franchise:
Franchise funding works a lot like a startup loan, but instead of starting a new business, you will be opening a new location of an already existing business. If that sounds like what you want to do, then franchise funding may be right for you.