Starting any business has a price, so you need to determine how you're going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you're planning to leave your current job to focus on your business, do you have some money put away to support yourself until you start making a profit? Find out how much you're going to need.
“Not all businesses meet business loan eligibility requirements,” was Ali's initial comment on this topic. “Most banks have an income eligibility threshold of 1.25 times your expenses, including the repayment amount. [So] even if you do meet the requirements, think carefully before taking on the loan, and be sure you can service the repayment terms.”
Rent and rent escalations. Some landlords will give free rent for the first month or two of a lease. Fixed rent over longer-term leases is relatively rare. Sometimes landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange for a CPI rent increase that does not kick in for at least the first two years of the term. Then, try to get a cap on the amount of each year’s increase. If you have to live with a rent escalation clause, try to negotiate a predetermined fixed increase; for example, a rent of $5,000 a month the first year that would only increase to $5,200 a month the second year and $5,400 a month the third year.
In addition to serving as associate chair, Eddie is a principal lecturer for the highly ranked Supply Chain Management program in the W.P. Carey School of Business at Arizona State University. Eddie has taught over 30,000 students in person and millions more online via videos and digital textbooks. His digital content is used by both top-ranked universities and Fortune 500 companies around the world. He has also provided consulting services for companies in the energy, publishing, retail, technology, global health, and agriculture industries. Eddie likes to spend his spare time on a yoga mat.
Short-term loans like the ones offered by OnDeck have higher rates and fees compared to longer-term loans. Effective interest rates start at 9.99%, and if you have a newer franchise and/or poor to fair credit, your rate will likely be higher than that. Nevertheless, OnDeck is one of the few reputable sources of short-term, unsecured business loans offered to franchise owners, and also one of the fastest. OnDeck is additionally one of the few online franchise lenders willing to lend to applicants with poor credit.
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You need to be prepared for a rejection of your loan, and you need to be prepared to re-work your business plan, save more money or do whatever else the loan officer suggests to secure a loan. It can be hard not to take a rejection personally, but remember that the lender is not rejecting you or your business idea–they are simply rejecting the opportunity to help you finance your business. You need to rework your business plan and/or secure more capital before you try again.
For existing franchises looking for working capital, another form of alternative financing comes from monetizing the franchise’s balance sheet to obtain funding. Using the franchise’s commercial real estate, or by tapping into the franchise owner’s personal real estate, an asset based lender can collateralize the real estate and provide working capital up to 90% of the real estate’s equity.
Length of lease term. Landlords are typically willing to make concessions for longer-term leases. However, your company’s needs may change and you could find yourself locked into a lease for an office space that is too small, too big, or with rent that is above-market if demand for space subsequently declines. Try to negotiate a shorter-term lease with renewal options—a two-year lease with a two-year renewal option, for instance, rather than a four-year lease.
Online lenders: While you may lack collateral, run a new business and need money quickly, you may find that an online lender is your best option. In general, online lenders should be a “last resort.” The average APR for online loans can be as high as 108 percent, making it difficult for small businesses to pay the money off before the debt balloons.
Mid Prime franchise loans are a great tool for small business owners who are unable to get bank rate working capital, but don’t want to pay exorbitant rates that a small business owner would get from a business cash advance. Alternative loans are private, non-bank loans and have much fewer credit and documentation requirements than a bank would require. Additionally, an alternative loan will fund within days, as opposed to months.
Franchise businesses serve as the backbone of the restaurant and retail industry. A successful franchise often starts as a small local business that catches the eye of savvy investors. Starbucks, McDonald’s, Walmart and Whole Foods are just a few of the many corporations that started as small mom-and-pop operations and were later franchised into nationwide networks.
Data as of March 2017. Comparison of longest average store hours in the regions (MSAs) in which TD Bank operates compared to major banks. Major banks include our top 20 national competitors by MSA, our top five competitors in store share by MSA and any bank with greater or equal store share than TD Bank in the MSA. Major banks do not include banks that operate in retail stores such as grocery stores, or banks that do not fall in an MSA.
If you own a home, and have 20-30% equity in it, then you may be able to get a home equity line of credit (HELOC) with a low interest rate. These funds are great to start a business, and can be used for any of your startup fees, including your franchise fees. With a HELOC you can get access to a lump sum immediately and draw against the total as you need it. Like a normal business line of credit, you only pay interest on what you’re using.
Franchisees who are operating a franchise location typically have their pick of financing options. We think the streamlined SBA loan from SmartBiz is the best option for those looking for up to $350K in working capital. With low SBA rates and 10-year repayment terms, these loans do not squeeze cash flow. Plus, SmartBiz has drastically reduced SBA loan funding times. Prequalifying online takes just a few minutes and they get loans funded in as little as 2 weeks.
Work with the franchisor’s preferred lenders: Often times, franchisors will partner with preferred lenders that they refer you to for financing. They may also have relationships with leasing companies that can lease you essential equipment for your franchise. When possible you should look at working with these lenders, because they’re familiar with your franchise brand and business model.
Small businesses have a tougher time getting approved due to factors including lower sales volume and cash reserves; add to that bad personal credit or no collateral (such as real estate to secure a loan), and many small-business owners come up empty-handed. Getting funded takes longer than other options — typically two to six months — but banks are usually your lowest-APR option.