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By Benetrends • December 26, 2014

What is the Most Common Type of Loan for Purchasing a Franchise?

A Small Business Administration (SBA) loan is the most common type of loan for purchasing a franchise. Because the SBA provides up to an 85% guarantee to the bank, banks are more willing to assume the risk of lending money to a “start-up” business. It’s a common misconception that the SBA approves loans. The SBA only provides a guarantee to the bank; if the bank is a PLP lender (Preferred Lender Program) then the bank is still the entity approving the loan.

A bank will typically require you to provide 20% to 30% of the total cost of the business and the needed working capital. For example, if you need $150k to purchase your franchise and $50k in working capital, for a total project cost of $200k, the bank would want you to put $40k to $60K towards the project and the bank would provide a loan for balance. In addition to the capital injection, the bank will require some form of collateral. This can be a combination of business and personal collateral such as the equity in your home, real-estate or other investments.

Banks all differ on what criteria they focus on when deciding whether or not to approve a loan. These parameters are known as the bank’s credit box. Some banks place more emphasis on your credit score, other banks may be more interested in the amount of collateral you can provide. Some banks may avoid certain industries because they already have enough exposure to that industry in their loan portfolios. Knowing a bank’s credit box can avoid the frustration of applying to a bank that will have little or no interest in approving your loan. This is one of the reasons many entrepreneurs choose to use a loan consultant to help them obtain an SBA loan. A good consultant will know which banks will have an interest in your loan application and will only apply to those banks, thereby increasing your chances of a quick and painless approval. When you are preparing you loan application you will need to include a comprehensive written business plan, three years of tax returns a personal financial statement and a personal resume.