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Different Kinds of Loans Available to Franchisees

A brief explanation of the two most common loans available to franchisees—and how to choose the best loan for your business.

For many, investing in a franchise business is one of—if not the most—significant investments they will make in their lifetimes. Even if one meets a given brand’s minimum net worth and liquidity requirements, a loan of some sort is likely necessary to get the business up and running. As it’s rare for a franchise candidate to have all of the funds to pay for a franchise out of pocket, ensuring you find the best loan to get started is crucial. There are a few different types of loans available to franchisees, Small Business Administration (SBA) loans and short-term loans among them. Each has its pros and cons, but what’s most important is figuring out which fits best with your lifestyle and your business. 

SBA Loans

SBA loans work to make funding more accessible for small business owners, making this financing option a top choice for a lot of franchise prospects. It’s important to note, however, that in order to qualify for this type of loan, the franchise brand you’re choosing to partner with must be on the Franchise Directory list. If the brand is not on the list, you are not eligible for an SBA loan. The only way for a brand to make it on the list is for the franchisor to submit it themselves. 

The best part about being eligible for this loan? Approximately 10% of SBA loans are specifically allocated to franchisees, giving prospects an excellent platform on which to be considered—and approved. The risk involved here is related to interest rates. SBA loans typically have variable interest rates that can be negotiated between bank and borrower, but it’s important to note that SBA loans are subject to maximums as defined by the association, so franchisees need to feel confident in the business they are investing so as to generate enough business to cover the payments if the rate rises.

Short-Term Loans 

Short-term loans are best for franchisees who expect to be able to pay back all their debt within a year or two. Unlike traditional loans that have payback periods that can last for decades, short-term loans are meant to give those who anticipate generating the funds to pay back their loan quickly the capital to get their business off the ground in the interim. These loans are great for those looking to invest in a franchise they have the cash to pay for upfront but choose not to in order to save that money to invest in opening costs or incidentals. These loans have high monthly payments, but that comes with being debt-free in the very near future.  

While these kinds of loans may not seem so different, the option you choose before getting your franchise off the ground is crucial. Starting off your business on the right foot is key in ensuring future success, so make sure you’ve done your research, and understand what type of loan is best for your situation and your goals.