While picking a franchise to purchase can be a difficult task, getting financing doesn’t need to be. In the past, navigating the franchise lending world was often difficult—both for you and for franchise lenders. However, with the advent of new loan products and lending services that help find a franchise loan that is right for you, the franchise lending landscape has changed dramatically. Below we’ve summarized some key points from an excellent article on How To Get A Franchise Loan on BoeFly.com for those entrepreneurs considering a business loan for a franchise start-up or existing franchise.
For the full scoop on the franchise funding process and on franchise loan options, click on the Franchise Funding Options Infographic to the right. For the uninitiated, the talking points provide a quick understanding of the market; for those serious about securing a franchise loan, we encourage you to give the full article a read.
Which franchise loan product is right for me?
Many potential franchisees are unaware of less conventional sources of funding––including using equity from a home loan or a 401(k) plan––and often times these sources can provide a helpful jump-start to getting your business up and running. Additionally, a franchisee may find that his or her needs fit nicely with Small Business Administration (SBA) loan products, which allow lenders to extend credit to borrowers, especially those to whom they may not be able to extend a conventional loan to. In any case, there are more sources of funding than you can probably imagine, so starting with a service like BoeFly that does the work for you can be a great way to get started. Better still, give the Franchise Fundability App a try to learn how fundable you are in the eyes of a business lender.
What do franchise lenders look for?
When franchise lenders review your loan application they consider a myriad of factors, such as Personal Credit (credit score), Management Experience and Net Worth, but two items lenders pay close attention to are Loan-To-Value (LTV) and Debt Service Coverage Ratio (DSCR). LTV is a measure of the total value of the loan amount compared to the collateral pledged; DSCR is a measure of the cash generated that will be available for the loan payments. If you do not offer sufficient collateral or if projections do not demonstrate the ability to service debt then lenders may shy away from your loan request, so it is important to understand the accuracy of your projections and present a lender-ready loan package before you meet with a business lender.
How do I apply for a loan?
The first step to apply for a loan is to ensure that you are well-organized before connecting with a lender. The goal is to present a lender-ready loan package before you meet a lender to reduce the underwriting period, avoid misunderstandings, as well as prove that you will successfully put the lender’s money to use and can be trusted to repay the loan. Using an full online service like BoeFly or working with a financial adviser can help you address any deficiencies within your loan package.
The second step is to determine how and where you apply for a franchise loan. Traditionally, you would reach out to several key contacts for your loan application, including your own bank, local business lenders, and national lenders. Of course – this process can be expensive and time consuming – both in terms of the time and cost to apply for a loan at multiple banks (and the potential damage to your credit score that may cause), as well as the possibility of losing the business opportunity you are pursuing. An alternative, however, would be to use a service like BoeFly, which guides you in preparing a loan package and allows lenders to evaluate the lending opportunity and engage with you directly without officially applying at the bank.
Only once it seems like you may be a good match will the lender issue a proposal or term sheet on the financing and then officially invite you to apply––saving not only your credit score but also time and money.
To learn more about the loan options available to you and details about the funding process, timelines, etc, follow the link to read the full How To Get A Franchise Loan article.