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Financing a Franchise for $350,000 or Less

Franchises come in all sizes requiring a with a wide variety of capital and equipment needed to operate the business. This article is the first of a two-part series of articles offering an overview of the financing available based upon the amount of money required to capitalize the franchise.

Small Business Administration (SBA) Express Loan

In 2014, the Small Business Administration (SBA) introduced the Small Loan Advantage loan program some lenders refer to as the SBA Express loan.  After the “The Great Recession”, many homeowners lost their real estate equity needed in most cases as a collateral requirement for an SBA 7(a) loan approval.  Consequently, many applicants were unable to secure financing because they lacked the home equity to collateralize their loan request.  The SBA Express loan is capped at $150,000 thus, limiting the lender’s risk so real estate collateral is not required to collateralize the SBA Express loan.

This government backed loan is designed to provide up to $150,000 of working capital to support the franchisee until the business generates positive cash flow. The loan process for an existing business takes approximately 90 days to fund the loan. The loan approval requires good personal credit (700+), liquid assets ($50K+) and attention to detail.  If the use of the loan funds is to finance a new location, the loan can be approved in advance, however the funds will not be distributed by the bank until the new location has received a certificate of occupancy. This insures that the money will be used to operate the new business & will not be used to fund construction. The interest rate for this loan is a variable rate calculated by starting with the prime rate as published in the Wall Street Journal which is currently 5.5%. The bank charges a 2.75% risk premium on this loan so the interest rate is 8.25% now. The repayment term is 10 years and there is no pre-payment penalty so if the franchisee is extremely profitable, the loan can be prepaid to save interest expense.

Capital Leases – Leasing Equipment to Own

The most common financing option for equipment needed to operate any business is a capital lease. The main purpose of a capital lease is to finance the equipment while preserving the owner’s working capital.  Franchisees can finance the purchase of their proprietary equipment, security systems, computer hardware & software, flooring, outdoor signage and other tangible items needed to run the business using an equipment lease.  The owner(s) are required to personally guarantee equipment lease. The required down payment ranges from a 1 lease payment up to 20% of the amount financed. Lease documentation fees range from $95 to $495. Repayment terms range from 24 months up to 60 months. All payments are tax deductible, so they lower taxable income and, in turn, tax liability. Since most franchisees intend to keep their equipment long term, a typical end of term purchase option is $1.00.

Conclusion

In conclusion, equipment leases and SBA Express loans are complementary products that enable the perspective franchisee with good personal credit to secure financing. Since the collateral used to secure an equipment lease is the equipment being financed and the collateral for the SBA Express loan is the business, these 2 debt financing products are compatible! This highlights the best part about this financing combination - the collateral is not your home … just your business assets!

Paul Bosley, owner of Healthclubexperts.com dba Business Finance Depot, has been financing fitness centers and franchises for over a decade. For more information you can reach Paul at paul@businessfinancedepot.com or (800) 788-3884.

Paul Bosley Managing Member
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