The Best Business Loans for Franchise Purchases and Improvements

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business loans for franchise

Are you exploring business loans for franchise purposes? You’re likely bringing some of your own money to the table to finance your dream. However, that doesn’t mean that you won’t need help with other startup costs, future expansion or ongoing funds. You might be surprised at how many options there are in the marketplace. This guide will help get you up to speed on the most popular franchise financing options according to two main objectives: buying a first/additional/multiple franchises and funding existing franchise operations.

Get ready to feel better about your financing options for the next chapter in your entrepreneurial careers. Your franchise ownership goals are within reach.

Buying Your First/Additional/Multiple Franchise Locations

Whether you’ve got your eye on owning your part of a franchise or ready to expand your franchise footprint, you’ll need one of the many flexible-use business loans for franchises.

The three most popular types of franchise financing are:

  • Traditional loans
  • Small Administration (SBA) loans
  • Franchisor financing

Look at how each of these financing options can fit the needs specific to someone purchasing an initial franchise.

Traditional loans

When considering the different business loans for franchises, traditional business loans top the list. Proceeds can help purchase or expand franchise holdings.

Traditional loans are smart financing options for small business owners confident that they have the financials and good credit to qualify. With generous loan limits, highly competitive interest rates, and flexible terms, these loans will likely offer some of the best rates in the market. You’ll need to come to the table equipped with solid financials. The rigorous underwriting process is one of the reasons these loans typically offer the most competitive terms. Traditional loans might be an attractive option. Show three years of tax returns, a strong personal financial history and a good credit score. The lender will verify fund source you’re using for your down payment.

With traditional loans, your franchise choice could play a significant role in the approvals process. Lenders like to see big brand names with proven track records in the market. Franchises with few locations might hurt your application. These franchises haven’t worked in multiple markets and various economies. Yet, if you’re a new franchise owner, a traditional loan can use your personal credit and financial history to launch your new venture.

SBA 7(a) loans

The SBA 7(a) loan program is hands-down the most popular loan program. It’s a reliable option for financing franchise startup and expansion costs. When you use these types of business loans for franchises, you’ll find competitive rates and virtually unlimited use of funds. Loan Limits are generous, and flexible terms are perfect for a franchise on the rise.

The first step to qualify for an SBA (7a) loan is to make sure your franchise is listed in the SBA Franchise Directory. If they don’t list your franchise type, you can apply for participation in the directory (note: the SBA will require additional documentation).

Loan limits are up to $5 million and terms range from 10 to 25 years. Interest rates are generally in the single digits (7% to 9.5% is a good range to consider). Prospective borrowers will usually have to be in business for at least two years. This makes the SBA 7(a) loan a better match for existing franchise owners, or those purchasing a franchise in an industry where they have a proven careers track record. Lenders will use your credit score and business financials for qualification. While the approvals process isn’t speedy, you’re rewarded with some of the best rates and terms, aside from traditional loans.

The only limit to an SBA 7(a) loan is borrowers can’t use the funds to finance franchise or royalty fees. If you choose to go the SBA 7(a) route, make sure you earmark other funds for these startup costs.

Franchisor financing

Many of the nation’s leading franchises offer direct financing to entrepreneurs. Of course, they want to make it simple for owners to get up and running. This one-stop-shop approach is potentially perfect for those looking to open their first location, adding a location, or purchasing multiple locations at once.

While the rates might not be as competitive as traditional loans or the SBA 7(a) loan, there’s something to be said for a streamlined process. As you consider all the options for business loans for franchises, it’s worth it to speak to the franchise and see what options are available. Be sure to have your attorney or accountant review any financing options offered by the franchise. Then you can compare the terms between a traditional loan, SBA 7(a) loan and the franchise’s direct financing side-by-side.

Funding Ongoing Franchise Operations

You may find times where you need a cash infusion to help fuel operations and growth. The best business loans for franchise needs in these cases is the one that matches:

  • The reason you need the funds
  • How long you need to repay the funds
  • How much you need to borrow

Here are three financing options franchises can use to keep operations running smoothly and make specific improvements.

Traditional business loans

If you know you need a fixed amount of cash for an upcoming franchise improvement or expansion expense, a traditional business loan can help. With fixed terms and rates, small business owners can fund franchise expenses with a predictable impact on their monthly budget.

Repayment terms are often flexible, including payment frequencies based on your current cash flow. Traditional loans have stringent qualification guidelines, and not all businesses can qualify with ease. You’ll need to have existing operations with a proven balance sheet, a plan, and your financials in order.

Lines of credit

If you’re looking for a more flexible way to access the cash your franchise needs, a line of credit might be the ideal tool.

Lines of credit can be used for nearly every purpose imaginable. You can draw as much or as little as needed–and only pay interest on the funds drawn. Once you pay it back, your credit line is once again fully available for use. There’s no need to go through the qualification process again.

For businesses that may not qualify for a traditional loan, lines of credit can fill that financing gap. Credit scores aren’t weighed as heavily in the approval process for most lines of credit, either. These features combined make lines of credit ideal to fund everything from cash flow gaps to seasonal inventory ramp-ups. The sky’s the limit.

SBA 504/CDC loans

While the SBA 7(a) loan is an ideal fit for initial or additional franchise purchases, you’ll need a different SBA loan type for funding ongoing business concerns.

The SBA 504/CDC loan has a narrow scope of use. Funds must be used for acquiring, renovating, or improving real estate or equipment. A borrower’s franchise location must also be U.S.-based. This type of loan can help fund making improvements to franchise real estate, buying real estate, or even upgrading heavy equipment to speed operations.

As with the SBA 7(a) loan, your franchise needs to be listed in the SBA Franchise Directory to be eligible. While these loans are slower to fund than traditional bank loans and lines of credit, you’ll likely be rewarded with some of the best interest rates. With all of the options for business loans for franchises, there’s one out there that makes perfect sense for your financials, credit and goals. And, if you’re still trying to determine the next steps in your franchise financing plans, you can always reach out to a loan officer to discuss.

Bernadette Abel

Bernadette Abel

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How to Recover from a Small Business Loan Rejection

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How to Recover from a Small Business Loan Rejection

Rejection always hurts, and when it’s from the bank on a small business loan, it can sting a little bit more than it did in high school. Loans are the lifeblood of most small businesses, and without them, the company could crash and burn. In fact, according to the Small Business Administration, 27% of the small businesses surveyed stated they weren’t able to receive the funding they needed to expand their businesses.

However, there is hope. Many businesses have been rejected only to recover and secure the financing they need on the next application. Here are our tips to help you recover from a rejection.

Why Would A Small Business Loan Be Denied?

First thing’s first, you need to be able to pinpoint your misstep to correct it in the future. Most lenders will give you the reason that your application was denied and it is usually one of two issues:

  • Low FICO Score
  • Not enough revenue

Before lending to a small business, just like any loan, they want to ensure that you have a solid history of repaying your debts on time and in full. If your business and personal credit scores are less-than-stellar, lenders will perceive you as a risky investment.

Additionally, lenders want to know that borrowers can make the minimum monthly payments on the small business loan. This is where your business’ cash flow comes into effect – they’ll calculate your debt to income ratio to see how you would be able to handle the monthly payments.

Correct the Problem

There are both short-term and long-term solutions. You can’t fix your credit score in a week, but if you make it a priority, over time, you’ll be able to improve it. In the short-term, you can, first of all, ensure that your credit report is error-free. It happens more often than you would think as 23.17% of all complaints to the Consumer Financial Protection Bureau in 2016 were about credit report inaccuracies.

Also, to improve your credit rating, you can take steps to pay off your debts to improve your debt to income ratio which will make you look more favorable to lenders.

To improve your revenue streams and to show the lender that your business is bringing in enough money to cover expenses and the loan payments, you should do your best to reduce expenses while increasing your profit margins. Improving cash flow can be a challenge for some small businesses. However, many are finding success after putting all of their attention and efforts into the process.

Other Things to Consider

There are a few things you can do to improve your odds of securing a small business loan, and are intended to make you appear more trustworthy as a borrower.

You can make a sizeable down payment on the loan to show that you’re serious about repaying the loan. You can also get a cosigner with an excellent credit score to make you appear more trustworthy. However, the cosigner would be on the hook for the loan as well, so ensure that you can confidently make the payments.

If you have a low FICO Score, you should also look into alternative financiers that could provide you with financial options. Big banks aren’t the only lenders out there. Additionally, a low credit score won’t necessarily take you out of consideration with alternative lenders.

What to Do Before Re-Applying

Before potentially going through the frustration and wasted time of a loan rejection again, you need to take a look at yourself and your businesses from the lender’s point of view; are there any red flags?

We recommend taking a hard look at your credit report. Even asking a lender’s advice about any problems they see. It may seem scary to ask them to point out problems, but the issues might arise when you re-apply for the loan anyway. So, it’s better to know beforehand.

Bernadette Abel

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Small Business Loan Application Checklist | Updated for 2023

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Building and running a small business is hard. It takes conviction, leadership, sound management and, every so often, a much-needed injection of financing. In both good and lean times businesses are often faced with the decision to pursue some type of financing. However, applying for and acquiring small business loans and alternate financing can often be daunting – even if you’ve done it before. And traditional lenders do not make that experience easy.

The good news is that getting financing doesn’t have to be this hard. We help thousands of small businesses everyday and want to share secrets of getting good financing options quickly. So, we have compiled a simple checklist of actions you can take to make the process fast, simple and easy.

However, as you get ready to apply for a small business loan, you should consider the following questions carefully to be sure you are not surprised by any unforeseen requests or adverse decisions from lenders.

Six questions every business must ask in 2020 before applying for a small business loan | Download PDF

1. Should you apply for a small business loan?

While a small business loan is a great way to reduce the pressure on cash flows, you could have viable alternatives for relieving cash flow crunch like selling debt owed to your business and renegotiating contracts to allow for longer payment terms. Also, make sure you have considered all alternate sources of financing including friends and family.

2. Is a small business loan good for your business?

Understand the effect of repayment of small business loan on your cash flow. A loan does not change the fundamental working of the business. It strengthens a fundamentally sound business and quickly breaks a business that is fundamentally unsound.

3. Can you qualify for a business grant?

Unlike loans, you don’t have to pay back grants. Before applying for a small business loan, see if you qualify for a federal or private small business grant. However, grants can be highly competitive and may not fit your financial time horizon.

 4. What types of small business loans are there?

There are over a dozen types of small business loans and alternative financing options for small business. The most popular options are government-backed SBA loans, revenue-based financing and factoring. Download this eGuide to learn more about different types of small business financing.

5. When should you apply for a small business loan?

Apply only once you have determined that a business loan will help strengthen your business, and you understand the different types of financing options like Small Business Loans, Revenue Based Financing, Factoring, and Equipment Financing. Each of these options have unique requirements so make sure you understand them well before speaking with a lender.

6. Should you work with a small business loan broker?

Brokers are a great resource to get offers from multiple lenders. However, many online marketplaces like Kapitus, will get you offers from multiple lenders without the additional broker fee which is borne by the borrower.

Small Business Loan Application Checklist| Download PDF

1. Run a quick cash flow analysis on your business account

Cash flows are one of the primary indicators that lenders use to understand the health of your business. Showing 3 to 6 months of positive cash flow can get you approved faster. It can even get you better financing terms for your small business loan. You can learn more about cash flows and ways to improve them in “How to Prepare Your Small Business for Cash Flow Needs.”

2. Collect at least 3 months of bank statements

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements. Remember, a well managed cash flow will directly improve your bank accounts.

3. Identify unusually large deposits to your bank accounts and gather supporting documents to help explain them

While presence of unusually large deposits can delay finalization of loans, they are not necessarily bad. Many businesses, like construction companies, can easily explain their presence on the bank statements. Some businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process and get really good terms on your small business loan by providing a copy of your account receivables and future contracts.

4. Get a copy of your free credit report and make sure there are no red flags

A strong personal credit goes a long way to assure any lender about the fiscal responsibility of the person running the business. You can get a free copy of your credit report from annualcreditreport.com. If you find any incorrect information on your credit report, contact each credit reporting agency (Experian, Transunion and Equifax) immediately to correct the issue. Keep in mind that while small delinquencies are understandable, lenders are uncomfortable with statements that show delinquencies on child support or recently dismissed (not discharged) bankruptcies.

5. Reduce the number of lenders to whom you owe money

Too many lenders pulling money from the business can create severe strain on its cash flow. Lenders want to know that the money they provide will help grow your business and not put additional strain on its daily operations. You may want to wait to finish your current loan obligations before going back to the market to raise more capital.

6. Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan on any open tax lien. A payment plan on a tax lien is far better than an open unresolved tax lien.

7. Get three business references

Trade references help to establish authenticity and credibility of your business. If you rent commercial space for your business, make sure that the landlord is one of your references.

8. Have tax statements handy when applying for a large sum

Lastly, businesses contemplating borrowing large sums over $75,000 should get a copy of their last year tax statement and business financial statements.

Obtaining small business loans doesn’t have to be a daunting process. Use this checklist before applying for a business loan or alternate financing and get the funds your business deserves.

Bernadette Abel

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5 things you don’t know about working capital — but should

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5 things you don't know about working capital -- but should

Working capital – the amount left over after subtracting current liabilities from current assets – is the lifeblood of a small business. However, many people are still confused about its benefits and uses. Here are five things that many small business owners don’t know about this important resource that helps a company survive and thrive:

1. Working capital can help long-term strategy, not just short-term issues.

Most entrepreneurs focus on every single cost when they start their business. But like a world-class chess player, you need to think several moves ahead, and be aware of the capital you’ll need to expand into new locations, hire new employees or buy more equipment. A franchisee, for example, should be aware of upgrades that will be required. Working capital is not just a resource for short-term needs, but for the entire year ahead.

2. You should monitor your cash flow weekly or even daily.

Many small businesses only review cash flow twice a year – on April 15th and October 15th. It should be a weekly or even daily exercise. When a solid client who has always paid on time starts slipping, it could indicate problems that you want to be aware of as soon as possible. According to Investopedia, the most important way for a small business to analyze its working capital is by operating cycle – the average number of days it takes to collect an account.

3. You should benchmark against other industries.

Small businesses are often satisfied when their working capital practices are equal to or better than their direct competitors. Look at industries with similar characteristics instead, which can provide more ideas on how to strengthen your working capital practices.

4. Encourage customers to pay on time.

Many small businesses have found themselves in difficult circumstances, or have even gone out of business, when they were afraid to call out important clients who constantly drag out payments. “It’s a simple thing to get accounting software and monitor your working capital,” says Dr. Rebel A. Cole, a professor of finance at DePaul University in Chicago.”But that won’t matter if you don’t follow up when people fall behind.” To improve cash flow, consider offering a discount for cash on delivery or taking credit cards over the phone.

5. It isn’t only for your down periods.

Many seasonal or cyclical businesses only focus on cash flow during seasons when sales are down. Smart companies monitor tools and financing practices that keep good working capital practices year-round, which can lessen the impact of the down periods. “If you only worry about working capital when you’re cash-strapped, you will become cash-strapped,” Cole says.

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What Red Flags Will Trigger an IRS Audit, and How to Minimize Them

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how to determine if you are going to get an irs audit

Is there an IRS audit in your future? Don’t simply hope the answer is no. How you handle your small business’ finances – in the way you spend money and how you document those transactions – can increase or minimize whether you’ll face IRS scrutiny. Focusing on red flags that’ll trigger an audit will help protect you and your business more efficiently. What the IRS says about the “examination process” includes a hopeful prospect: “Some examinations result in a refund to the taxpayer or acceptance of the return without change.”

Don’t count on it. And, remember: An IRS audit can inflict pain even if you come out smelling like a rose. The process of pulling together every financial record you need could put a strain on you and your bookkeeping department.

IRS Audit Triggers

So, what triggers an audit? General factors, according to the IRS, include the following:

  • “Related examination.”

This means: If the IRS audits one of your customers or suppliers, and asks questions about your tax returns, you might be next in line for scrutiny.

  • Information matching.

If there’s a discrepancy between your bank reports for the IRS (and you) and the interest it paid you over the course of the tax year, and what you report in interest income, a bright red flag goes up. Keep in mind that credit card transaction processors are required to file a 1099-K form to the IRS summarizing total payments you received that way.

  • Local initiatives.

Sometimes, regional IRS offices decide to focus on particular business sectors because it has found a lot of abuse there. There’s not much you can do to reduce your changes of an audit in this scenario.

Also, all things being equal, the type of business that you are – whether you’re a C Corp, or a Sub S or sole proprietorship – can affect your odds of being audited. That’s because it’s easier to blur personal and business finances when your personal and business finances are combined in a single tax return.

Another factor is the size of your business. The larger the company, the more money there is to be reclaimed by the IRS in a typical audit scenario if there’s any abuse. So, you’re more likely to stay below the IRS’s radar if your revenue is $1 million than if your revenue is $10 million. Even so, that doesn’t mean that you shouldn’t grow your business merely to lower your chances of an IRS audit.

Automated Audit Trigger System

The heart of the IRS audit process is called the “discriminant function system,” or DIF. The IRS assigns varying DIF scores to taxpayers–individuals and businesses–based on numbers and ratios they report. Like Google, the IRS doesn’t reveal anything about the DIF. Still, there’s plenty of evidence of where it focuses.

A basic example is the ratio of your total claimed business expense deductions to your overall business income. Of course, you can operate at a loss from time to time. But if that happens often, the IRS will probably take a closer look. Still, you’ll be vindicated if all of your expenses are legitimate.

The DIF focuses on areas typically prone to abuse, such as business meal charges and travel. If you frequently expense for these reasons, keep detailed records and receipts. This goes for expenses of at least $75.

Since 2018, you’re required to separate your food and drink expenses from the entertainment portion. The cost of the entertainment portion (e.g. theater and sporting event tickets) isn’t deductible. As always, keep notes on the purpose of business meals, who attended, and your relationship to those individuals.

Here are some additional areas of IRS scrutiny for statistical anomalies when looking for audit candidates:

  • Independent contractor overload.

If you use a lot of support from freelancers to whom you issue a 1099 instead of a W-2, this might trigger the IRS. Be sure you classify freelancers appropriately.

  • Home office deductions.

Remember: You can’t deduct the cost of an entire room if you’re only using the corner. The time you spend working in that room compared to everything else you use it for, matters.

  • Business use of a personal automobile.

This is an abuse-prone area, too, like food, drink, and entertainment expenses.

  • Sloppy math.

You might think an error involving an inconsequential amount of money isn’t a big deal. To the IRS (and probably the DIF system), small errors can be an indication of larger errors also present and worthy of discovery.

  • Large cash transactions.

In the unlikely event you are paid $10,000 or more in cash in a single transaction–and fail to report it on IRS form 8300–you could be audited.

Does Form 8300 Trigger An Audit?

The Internal Revenue Service places significant importance on the documentation required for IRS Form 8300 as it pertains to substantial cash transactions of $10,000 or more, in order to combat money laundering. Consequently, even though it is not guaranteed, submitting IRS Form 8300 may result in an audit.

There’s no set way of escaping the possibility of an IRS audit. But, by paying attention to red flags and preparing to answer possible questions about your expenses, you’ll save yourself a lot of grief in the long run.

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7 Reasons Asset Based Financing Might Make Sense for Your Fast-growing Company

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Fast-growing businesses may face a problem financing an expansion. But asset based financing may offer advantages over more traditional methods of borrowing money. Here’s what you need to know.

How Asset Based Financing Works.

Imagine that you are running a retail apparel company and need cash to grow your business. Instead of applying for a loan based on the company’s credit history, you might instead ask for financing secured by the inventory you hold. Clothing retailers usually hold significant levels of inventory (dresses, jeans, etc.) which may be used as loan collateral.

Many retailers also operate as wholesalers to smaller firms and so usually have unpaid invoices outstanding. Companies may also be able to use those invoices to help finance their own operations by contracting with an intermediary known as a factor. The factor buys the invoices at a discount in exchange for providing immediate cash.

Here are seven reasons consider asset-based financing.

What are the benefits of asset based financing?

When compared to traditional forms of lending, asset based financing can can offer a wide array of benefits – from fewer restriction, to cost savings, to less paper work. While it is not the best fit for every business, it does make sense to include it as part of your due diligence when selecting the best financing product for your business.

Here are seven reasons to consider asset-based financing.

1. Potentially lower costs

Asset based loans are secured loans. And, therefore, may be far cheaper than traditional loans which are usually based on the company’s financial history. If a loan is based solely on the credit history of a firm, it is considered an unsecured loan. As such, the borrower will get charged a higher interest rate. That’s because the bank may be assuming more risk when they make an unsecured loan.

The secured versus unsecured loan structures are similar to consumer loans, in that home loans may be cheaper than credit card debts. With a home loan, if you don’t pay your mortgage the bank may repossess your home; however, with credit card debt there’s typically no security deposit backing up the loan.

2. Asset Based Financing Requires Less Paperwork Than a Traditional Term Loan

While obtaining a traditional business loan might require you to document the financial history of your company’s operations, an asset-based loan likely would not. In other words, borrowing against the value of your inventory might be an easier way for a newer company to get financing than trying to get a traditional loan.

3. Fewer restrictions than traditional loans

Many loans have restrictions on how the money from the loan gets used. For instance, a bank may ask why you need a conventional loan (also known as a term-loan because it is given for a specified period) and how you intend to repay it. If you take out a term-loan and tell the bank you want to use it to remodel your retail stores, then that is how the bank expects you to use the proceeds. The good news is that asset based loans typically may have fewer use restrictions.

4. More flexible repayment terms

You must eventually pay back any business loan to the lender. However, not all loans are created equally. Asset based loans often don’t require the entire loan amount to be paid off according to a fixed timetable, often known as an amortization schedule. Term loan payments (including a pay-down of the principal balance) must be paid each month. Asset-based loans often have more flexible payment terms, allowing businesses to pay off the debt at a time that is most suitable given their cash flow. The result is potentially more flexibility for companies using asset based financing.

5. Streamlined balance sheets

If you take out a traditional loan, then the balance due appears on your balance sheet. Some asset based financing does not get recorded that way. For instance, if you sold your outstanding invoices to a factor in exchange for immediate cash, there would be no balance to show on your firm’s balance sheet. All you’d need to do is to note how you managed this financial transaction in a footnote on the financial statements. This is known as off-balance sheet financing.

6. A good way to finance working capital.

Companies experiencing fast growth may find it hard to get additional working capital via revolving lines of credit. On the same end, as the need for working capital increases your firm may have higher levels of inventory and larger invoices due from customers. You may use inventory and larger invoices as collateral to finance increased working capital needs.

Feeling more confident about your business to go shopping for a loan? Before you start looking you should understand what factors impact terms of your loans.

Bernadette Abel

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