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What are Franchise Loans?

Josie Myers
Josie Myers

Franchise loans are issued to assist someone purchasing a franchise. Like other types of loans, they must be paid back to the loaning party with interest. These loans are sometimes also called small business loans.

There are two types of franchise loans: traditional, and Small Business Administration (SBA). Traditional loans are granted by a particular lending agency through their individualized programs. SBA loans have terms and guidelines that are set by the SBA, a federal organization with the purpose of strengthening the economy by promoting the growth of small businesses.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

A traditional franchise loan is generally the more difficult of the two to obtain. The down payment on the business usually ranges between 30 and 40%. Personal credit is very important, and 100% collateral is usually required. A business plan and personal experience, along with an excellent staffing plan are absolutely necessary. With the failure rate of new businesses reportedly ranging from 30-50%, these lenders work to protect their investments and aim to provide loans to those most likely to succeed. While they are more difficult to find, those entrepreneurs who receive traditional loans generally have a business model with a greater chance of success.

SBA franchise loans are a bit easier to find, but there are still certain criteria that the SBA looks for. Although good credit is not the deciding factor in loan approval, it can be a positive when combined with other strong points. Bad credit will not completely exclude an applicant, but when combined with other factors, can provide evidence of risk that many lenders would be uncomfortable with. Although all potential franchise owners should have capital to work with, it is particularly important for those with bad credit to have cash at their disposal, since this cuts down on the risk to the lender.

The applicant himself does not necessarily need experience. The strength of the business plan, however, is absolutely key to approval. Creativity and a solid plan weigh more heavily in the approval process than personal history. If personal experience is not there, it is a good idea to have advisers, or other management staff written into the business plan to ensure a lower risk. The more an applicant surrounds him or herself with positive influences, the better the chance will be of a franchise loan being approved.

Businesses themselves also have to meet certain criteria to be considered for franchise loans through the SBA. The business has to be located within the United States, and be a for profit business with under $13.5 million in retail sales. The business cannot discriminate against any race or sex.

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