When attempting to finance a franchise acquisition, it can be difficult to know the best way to get funding. There are many options in banking to secure financing, each with their own benefits and drawbacks when used. SBA (Small Business Administration) loans can be used to finance a franchise acquisition and are less risky than many other options for franchise acquisition financing.
Loans obtained through the SBA are partially backed by the government, which is why they are less risky than other loan options. These loans can be obtained for different lengths of time and under different terms based on the needs of the borrower, qualifications for borrowing, and capabilities of the lending financial institution. Borrowers must have good credit and have some sort of equity for the loan. In addition, they are required to repay the loan out of the cash flow of the franchise after acquisition.
Most of the money obtained for franchise acquisition is used for franchise fees, working capital, or any improvements that are needed. Approximately ten percent of all SBA loans are used for franchise acquisition, with amounts ranging between $250,000 and $500,000. The interest rates of these loans are usually negotiated between the borrower and the lender. However, because the loans are backed by the SBA, interest rates are also subject to SBA maximums, which are linked to the prime interest rate. Veterans, a well as their spouses and survivors, may also qualify for a program through the Department of Veterans Affairs, which provide franchise financing using the lowest interest rates offered by the SBA.
Acquiring financing for franchise acquisition does not have to be complicated. In fact, using an SBA loan will not only provide the financing needed for franchise acquisition but will provide some security since it is a lower risk option for financing. In this way, potential franchise opportunities can be come realities.