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Starting a franchise business can be an exciting opportunity, but securing the right financing is key to making that dream a reality. If you're wondering whether it's possible to get 90% loan-to-cost financing for your franchise startup, the answer is yes. While most banks offer around 80% financing, there are options for qualified borrowers to secure up to 90%, depending on the strength of the deal. In this blog post, we’ll explore how you can access 90% franchise financing, what factors lenders consider, and how you can prepare to boost your chances of approval.
Understanding Franchise Financing Options
When it comes to financing a franchise startup, not all lenders will offer the same terms. Most banks cap their loans at 80% financing, meaning you'll need to come up with 20% of the startup costs on your own. However, some lenders specialize in franchise financing and can offer up to 90% loan-to-cost. This higher level of financing is available primarily for strong borrowers and well-structured deals.
Small Business Administration (SBA) Loans for Franchises
One way to secure 90% financing is through SBA loans, particularly for loans under $350,000. Certain banks will offer 90% financing for these SBA loans consistently. These lenders are often more flexible, even when borrowers have limited post-close liquidity, because they account for working capital in the financing plan.
However, one drawback is that these banks may not cover tenant improvements, meaning you’ll need to find additional funding for building out your space. The key is to match your financing needs with the right lender, as different banks specialize in different types of deals and industries.
Overcoming Franchise Directory Challenges
If you’re looking at emerging franchise brands, securing financing can be a little trickier. Many of these new franchises are not listed in the SBA directory or do not have a FranData certification, which can create hurdles for lenders. In these cases, lenders may request additional documentation, such as the Franchise Disclosure Document (FDD), to determine whether they want to move forward with the loan.
While it can be challenging to secure financing for emerging brands, it’s not impossible. With the right documentation and lender, you can still successfully fund a new franchise.
Loan Terms and Interest Rates for Franchise Startups
When securing a loan for a franchise startup, it’s important to understand the terms and interest rates involved. Most franchise loans will come with a 10-year term, and interest rates are usually based on the Wall Street Journal prime rate plus a margin. This margin can range from 2.75% to 4.5%, depending on the type of loan and the lender.
For loans based on financial projections, the margins tend to be on the higher end. Additionally, for loans over $500,000, lenders typically require additional collateral to secure the loan.
Working with PLP Lenders
A significant advantage in franchise financing is working with Preferred Lender Program (PLP) lenders. These lenders are able to approve loans without having to send the file to the SBA for underwriting. Instead, they handle everything in-house, which speeds up the process and makes it more efficient. PLP lenders are ideal partners for franchise startups because they are specialized and focused on approving these types of deals.
Occasionally, even PLP lenders will send marginal deals to the SBA for additional approval, but this is rare. Most of the time, they will handle everything on their own, giving you a faster, more streamlined experience.
Economic Factors and Bank Risk Tolerances
One interesting factor in franchise financing is how economic conditions and a bank’s risk tolerance can affect loan approvals. For example, a bank may reject a deal today but approve the exact same deal a few months later, depending on market conditions. Banks also tend to pull back from specific industries if their portfolios become overloaded, such as having too many loans in the hospitality sector. However, these same banks will often become aggressive again when they need to balance out their portfolio.
Understanding this fluctuation can help you strategize when to apply for financing, and it’s a good reason to stay in touch with your lender if your first application is declined.
Find the Right Franchise and Financing with Expert Help
For those looking to purchase an existing franchise, visit FranchiseResaleListings.com, where we offer customized searches and send weekly updates on new franchise resale listings. We are dedicated to helping you find the right opportunity and financing solution to make your franchise dreams a reality.