A bank loan that is unsecured by collateral is rare, even if you have good credit. Additionally, getting a loan with a mortgage on your home or other type of asset, you should be ready to be asked to put your own money on the line, about 20% of what is needed. Even if you have a healthy business and solid collateral, many bank loans for new franchisees happen when the borrower has established good relationships with the banker, or has prior experience or is a figure within the community. If that isn’t you, then you should consider a loan from the US Small Business Administration or SBA.
An SBA loan is partially guaranteed by the US government, which makes them less risky. The standard loan for a franchisee is known as the 7A, which is issued by a qualified lender or by a bank as well as being partly guaranteed by the government. Due to that backing, loans like these are seen as low risk. It’s possible to borrow up to 150K through an SBA express loan with no collateral if your credit is good.
A SBA loan of 5 to 6 year maturities can provide equipment and short term working capital. About 10% of all SBA loans will go to a franchisee that has a running size of $250,000 to $500,000 and with a maximum of $5 million. Most the money happens to be for all of the improvements, franchise entry fees, or for working capital. All borrowers must be credit worthy, and must contribute equity and out of the franchises cash flow, will have to repay the SBA loan.
Most SBA loans will have a fluctuating interest rate. While the rate is actually negotiated between the borrower and the bank, it is actually subjected to SBA maximums, which are combined with the prime rate. While having a low rate may be there initially, ensure that you will be able to generate enough business to cover the rising payments.
There are a few franchisers that will offer internal financing. For instance, companies may defer a small portion of the franchise fee, which finances the deal. Interest rates may seem high when compared to other options. Although, you may not have to provide collateral.
Sometimes, you may need to tap into your 401(k), IRA, or retirement funds instead of seeking a loan. Instead of doing an early withdrawal, which will be taxed, you should set up a C corporation that will own and operate the business. Then simply roll over the money from your retirement account into the profit sharing plan and direct the funds to be invested into your business. This is a risky option because if the franchise fails then your retirement fund will be gone.