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Buying a franchise can be an exciting venture, but what if the business is located in a different state from where you reside? Understanding the nuances of securing SBA financing for an out-of-state franchise is crucial. Here's a detailed guide to help you navigate the process and ensure you get the funding you need.
Understanding Bank Proximity Preferences
Most banks have specific preferences regarding the proximity of a franchise business to the borrower’s primary residence. Typically, they want the business to be within a 2.5-hour driving distance or a 60-mile radius. This preference stems from the banks' desire for practical lending, as closer proximity allows for easier oversight and management of the business.
The Unwritten Rule
It's important to note that these proximity preferences are not formal guidelines. They are not included in the Standard Operating Procedures (SOP) for SBA financing. Instead, they are internal rules that about 80% of banks follow under what they call prudent lending practices. This means there’s still room for flexibility if you find the right lender.
Exceptions and Possibilities
Despite the common proximity preference, exceptions do exist. Some banks, credit unions, and non-bank SBA lenders are open to financing franchise startups in different areas, including out-of-state locations. The key is to find lenders who are comfortable with such arrangements, especially if there are strong compensating factors.
Key Factors to Increase Your Chances
If you have good liquidity, a high net worth, a strong credit score, and experience in operating businesses remotely, your chances of securing SBA financing for an out-of-state franchise improve significantly. Lenders look for these compensating factors to mitigate the perceived risks associated with financing a business far from the borrower’s residence.
Good Liquidity
Having ample liquid assets reassures lenders that you can manage the initial cash flow needs of your business without financial strain.
High Net Worth
A strong net worth indicates financial stability and the ability to weather potential business downturns.
Strong Credit Score
A good credit score reflects your reliability and track record of repaying debts, making you a less risky borrower.
Experience with Remote Business Management
Demonstrating experience in managing businesses remotely can convince lenders that you have the necessary skills to oversee an out-of-state franchise effectively.
Navigating the Process
Finding a bank that is willing to finance an out-of-state franchise might require you to speak with multiple lenders. It's essential to be persistent and thorough in your search. Here are a few steps to help you navigate the process:
- Research Potential Lenders: Look for banks, credit unions, and non-bank SBA lenders with a track record of financing out-of-state businesses.
- Prepare Your Case: Highlight your compensating factors, including liquidity, net worth, credit score, and experience.
- Consult Experts: Consider seeking assistance from professionals who specialize in SBA financing.
- Be Persistent: Don’t get discouraged by initial rejections. Keep reaching out to different lenders until you find one that is willing to work with you.
Conclusion
Securing SBA financing for an out-of-state franchise is indeed possible, though it may be a bit more challenging. By understanding the common preferences of banks, preparing a strong case with compelling compensating factors, and being persistent in your search, you can increase your chances of success. Remember, expert assistance is available to help you navigate the complexities of SBA financing. Good luck with your venture, and happy franchising!