7 franchise acquisition financing options to consider
These are the best ways to finance a franchise resale purchase. Keep in mind that sometimes a combination of several of these funding options must be done to meet your financing goals:
1 – SBA 7(a) Loan
An SBA Loan (Small Business Administration) is the most common loan program and is a great financing option for franchise resales over $150K if there is 3 years of cash flow/profit history and the sale price is less than 4 times earnings. Whatever the cash flow/profit is, the business cannot sell for more that 4 times that amount. The SBA, if you go to the right SBA bank or utilize a franchise funding specialist, will provide a 10 year loan, include working capital, no pre-payment penalties, and a rate that cannot go higher than 2.75% over prime. The SBA 7(a) loan is beneficial because even if personal and business collateral is low or there is none, SBA Banks may still approve and fund your franchise resale acquisition. An experienced Franchise Funding Specialist, like Diamond Financial will maximize your chances of approval and make the entire loan process faster and easier. Not all SBA Banks are the same. Many are conservative and may not want to finance loans sizes under $350K (lower profit margins for the bank), so working with a specialist is important.
Other good options to finance a franchise acquisition or franchise start-up:
2 – Rolling over retirement funds
Roll over your retirement funds (401K or IRA) and pay no taxes or penalties. It must be retirement money from a prior job or company you were at. A C-Corp business formation is required.
3 – Home equity line of credit
A great option if you have equity in your home. Interest rates on home equity loans are also usually pretty low.
4 – Promissory Note to the Seller
Also known as a seller note, a Promissory Note to the Seller combined with some cash as a down payment can be a great way to finance a franchise resale. This is a popular form of financing on franchise resales under $250K or when the business’s financials are poor or do not support a bank loan such as an SBA 7(a) loan.
5 – Unsecured Business Line of Credit
An Unsecured Business Line of Credit (unsecured meaning no personal or business collateral needed for approval) can be another strategic borrowing option especially on franchises under $250K and if the franchise buyer has a 700 or higher personal FICO Score. Unsecured lines are more expensive than SBA loans, but are faster and easier, often taking half the time to fund.
6 – Conventional (non-SBA) loans
An option on larger franchise acquisitions over $1 million. They are usually faster with a lower rate, but shorter term.
7 – A securities-based credit line
A securities-based credit line (or portfolio loan) is another option to consider, which offers lower rates, high LTV’s and funding in approximately 2 weeks. It is an asset-based loan, leveraging non-retirement publicly traded securities.
Franchise Flippers thanks Don Johnson, President of Diamond Financial Services and owner of FranchiseLenders.com for contributing these tips and sharing his expertise in the franchise resale and lending space.
Franchise Flippers is the premier franchise resale marketplace and resource center. We help franchise buyers and sellers connect and get deals done.
