How to Finance Your New Franchise

You’ve selected the perfect low-cost franchise for your needs and desires, so now comes the hard part: how to pay for it.

Formulating a business plan, understanding your financial strengths and weaknesses and finding the right lender can get you your all-important funding, BoeFly, an online marketplace for small business loans, advises.

BoeFly also says that establishing a strong business plan and model as well as understanding the franchise brand are essential before you are ready to work with lenders. Poring over the brand’s franchise disclosure document and talking with existing franchisees and financial professionals will help you form your business plan and build financial projections. Outlining your management and marketing skills, past successes and future goals by including resumes for yourself, planned partners and other employees will allow all parties involved, from the franchisor to lenders, to understand the strengths of the ownership and management team, according to BoeFly. Personal credit history and financial strength will also play an important role in opening a franchise.

Here is more sound advice from the BoeFly experts:

There are sources of startup money that may not be as obvious to franchisees that can be helpful. Using equity from a home loan or a 401(k) plan can provide the jump to your business if other sources of financing are not available. And sometimes a franchisee looking to open his or her first franchise can use a Small Business Administration loan. SBA loans are made by banks or other participating lenders, not the government.

Having liquid assets, valuable collateral and a good credit rating will go a long way to helping you get a franchise loan. According to The Wall Street Journal, most banks will be looking for about one-fifth of franchise startup costs to come from the owner before considering lending options, and without a good credit score, most lenders won't feel comfortable extending a loan even if the proposed franchise is known for success.

In some instances the franchise itself will extend financing to you. Some companies even build the store for new franchisees and lease the location to you, meaning minimal startup costs, and the transaction is handled directly between you and the franchisor.

The brand you choose to work with may provide upfront estimates of how much it will cost to start a new business and can also give you information on monthly and year-over-year revenue goals and expected progress. This information, if available, is often found in Item 19 of the FDD.

The first step in applying for a franchise loan is making sure you are prepared before you meet with a lender. You should have identified the franchise you want and should have your supporting documents and loan package organized. The goal is to make a great first impression to show that you are prepared and can be trusted to repay the loan.

The second step is to be savvy about how and where you apply for a loan. Key targets for your loan application are your bank, local business lenders and national lenders. Within that group, it is also important to target lenders who may be familiar with the brand and have made loans to other franchisees. But don't apply everywhere, BoeFly advises. That can lead to inefficient use of your time and money. The process can take 120-190 days before you get funded. Also, some lenders charge application fees so it can get expensive, but more importantly, a lender may do a hard credit pull when you apply. Multiple hard credit pulls within a time frame can dent your credit score.

One alternative is to use a service like BoeFly. It allows lenders to evaluate your loan package and credit and engage with you directly without officially applying at the bank. Only when it seems like a good match will the lender issue you a proposal or term sheet on the financing and then invite you to apply at the bank.