Franchise Financing Basics

Overcoming the hurdle on how to finance your franchise purchase is a major milestone. We will assist you on beginning this process and introduce you to a network of franchise financing providers offer competitive rates, which will allow you to jumpstart your franchise business.
funding, TC Franchise Specialist, Kip Garwood-Tull
401K/IRA Funding:  Utilize your existing 401K or IRA to fund your franchise. It is also recommended you have a minimum of $25,000 in your account. Also, you are not required to rollover the entire balance, partial rollovers are acceptable The advantages include:

  • Start your business debt free
  • Quick and easy to get funds (2-3 weeks or less)
  • Tax-deferred
  • Pay yourself a salary from the start
  • Build up equity quicker as there is no loan payment.

Unsecured Lines of Credit: This is a viable option if you have a  FICO score of 700 or higher. the unsecured line of funding comes in the form of credit cards. These cards are issued in your franchise business name and do not require a personal guarantee. This type of credit is relatively simple to obtain and usually takes approximately 3 weeks.

Securities-Based Lines of Credit: This lending option allows you to borrow money using your investment portfolio as collateral, while still maintaining ownership and control of your assets.

Home Equity Lines of Credit: This funding program is based off the equity in your home. Different than a loan, it is an open line of credit that can be used for financing your franchise business.

SBA Loans: The Small Business Administration (SBA) underwrites select banks that lend money for franchise financing. Typically, if a franchise company is pre-approved by the SBA, a bank is more likely to provide franchise financing. Two SBA loan products available for franchise business owners are the SBA 7A and SBA 504.

  • SBA 7a Loan-  Can be used for business start-ups and existing businesses. It’s a very flexible loan that can be used for “any legitimate business purpose,” including business acquisition, working capital, machinery, equipment, furniture, fixtures, and leasehold improvements. The typical 7A loan amount is from $100k to $5 million. The 7a is a collateralized loan, so you will need to provide some type of collateral, and have strong personal credit.
  • SBA 504 Loan- 504 loans are less common for star- ups that  7A loans.  A keyis that the 504 loan must include real estate or equipment. Because there is often real estate involved, the down payment is usually less than a 7A loan, typically 10%
  • Patriot Loan: Active military or a veterans can apply for the Patriot Express. This is a SBA-backed loan program specifically created to you get into business for yourself. The program has reasonably lower interest rates and allows funding for both new or existing franchise businesses.
  • Others:
    • SBA Micro Loan- This loan was designed to provide small, short-term loans to small business concerns and certain types of not-for-profit child care centers. The maximum loan amount is $50,000, the average microloan is about $13,000. Microloans can be used for purchasing a new business, working capital, purchase of inventory, supplies, furniture, fixtures, machinery, or equipment. Business financials may be required if you are looking for an amount over $25,000.
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    November 1, 2013 Franchise Financing Basics

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