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Today’s franchises come in all sizes with a wide variety of franchise equipment. Consequently, the appropriate financing for the diverse franchises varies considerably based upon the $ amount of capital required. This article offers an overview of the best financing available based upon the amount of money required to properly capitalize any given franchise.
Financing a Franchise for $350,000 or Less
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 which is used as collateral requirement for a SBA 7(a) loan approval in most cases. Consequently, many perspective borrowers were unable to secure financing because they lack the equity in their home required to collateralize their loan request. The SBA Express loan is capped at $150,000 to limit the lender’s risk since the borrower’s real estate collateral is not required and business assets are used to collateralize the SBA Express loan. Since the collateral used to secure an equipment lease is the equipment being financed and the collateral for the SBA Express loan is the equipment needed to operate the business, these 2 debt financing products are compatible!
Capital Leases – Leasing Equipment to Own
The most common financing option for the equipment needed to operate any franchise is a capital lease. The main purpose of a capital lease is to finance the equipment purchase 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 lease payment up to 20% of the amount financed. Lease documentation fees may range from $95 to $495. Repayment terms typically range from 12 months up to 60 months. All payments are tax deductible, so these payments will lower business’s taxable income and, in turn, tax liability. Since the plan is to keep their equipment long term, a typical capital lease offers a $1.00 end of term purchase option.
Small Business Administration (SBA) Express Working Capital Loan
This government backed loan is designed to provide up to $150,000 of working capital to support the company until the business generates positive cash flow. The loan process 90 days to complete before the loan is funded. The SBA Express loan approval requirements are good personal credit & some liquid assets and the loan process requires 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 pay for build out expenses. The interest rate for this loan is calculated by starting with the prime rate as published in the Wall Street Journal which is currently 4.5%. The bank charges a 2.75% risk premium on this loan so the interest rate is 7.25% 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.
In conclusion, equipment leases and SBA Express loans are complementary products that will enable the owner of a franchise with good personal credit to finance the opening and expansion of a franchise. The best part about this financing combination of a SBA Express loan & equipment lease is that the collateral is your business assets… not your home … just your business assets!