This article illustrates the variety of financing products available in today’s marketplace and some of
the franchises that use these options to launch their start up franchisees and to expand their existing
franchisees. While not a full list of the franchise brands taking advantage of these various forms of financing, listing them here shows the wide range of franchises that use these options.
All financing options require the borrower to contribute an equity injection, so they have “skin in the
game.” The equity injection cannot be borrowed funds such as a home equity loan, unless the loan will be
repaid from an unrelated source such as a spousal earnings or investment income.
The typical sources of equity injection are savings, the sale of marketable securities, gifts from family
members and the Rollover as Business Start-up (ROBS) plan established by the IRS. A ROBS plan is an
arrangement where prospective franchisees use their retirement funds to pay for their new business startup costs in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new C Corporation franchise business.
In each section, the type of financing will be highlighted, typical franchisees using it and then examples
of typical use cases and terms.
You can download a copy of the information presented below by clicking here.
OPTION 1:
SBA 7(A) & 504 LOANS ($25,000 UP TO $10,000.000)
The Small Business Association (SBA) offers a national loan program which can be used to finance any
franchise approved by the SBA. All approved franchises are listed on the SBA franchise registry. The SBA
offers a substantial loan guarantee which reduces the lender’s risk, making securing an approval more
likely. SBA loans offer some of the lowest interest rates available and can be repaid over the longest term
available today.
The following information lists the six possible uses of SBA loans and some franchisors
using these loans in an outline format.
1. Financing a Start-up Business – Yogi Bear’s Jellystone Parks, Massage Envy, F45 Training, Venture
X, Jon Smith Subs, The Great Greek, Pembrooke Chocolatier, Fitness 1440, Athletic Republic, I
Heart mac & cheese & Carvel
• Use of Funds – The SBA 7(a) loan will finance up to 90% of the total project costs including equipment,
organization costs, build-out, deposits, inventory, working capital and franchise fees.
• Equity injection – Ranges from 10% to 30% of the total project cost depending upon lender and the
financial strength of the borrower.
• Résume illustrating industry experience, transferable skills and related education is very important!
2. Expanding an Existing Business – Same franchises listed above
• All of the above, plus:
• Cash-flow – An emphasis is placed on the profitability of the business based upon the business’
recent tax returns and interim financial statements.
3. Debt Consolidation – Same franchises listed above
• All of the above, plus
• Use of Funds – The funds are used to refinance business debt including existing mortgages, equipment
leases and loans. Credit card debt CANNOT be included.
• Qualification Rule – The resulting monthly payment must reduce the total monthly payments of all
debt being consolidated by at least 10%.
4. Business Acquisitions – Kampgrounds of America (KOA)
• All of the above, plus:
• Business Valuation – The Letter of Intent must be supported by a business valuation. The valuation is
conducted by the SBA lender using the seller’s tax returns and interim financial statements.
Common Criteria, Terms and Conditions for the Four (4) Uses Listed Above
• Collateral required includes all business assets. For loans over $350,000, additional collateral up to
the loan $ amount is required which typically includes real estate owned by the principle(s).
• Personal Credit – 700+ credit score is preferred
• Repayment Term – 10-year loan term for home-based businesses and locations being rented from
a landlord.
• Prepayment – No prepayment penalty
• Interest rate – Variable rate calculated by adding the prime rate as published in the Wall Street
Journal (currently 3.25%) plus a risk premium capped by the SBA at 2.75% (currently 6.25% interest
rate).
• Closing Costs – Approximately 3% of the loan amount added to the amount being financed.
• Timing – 90 -120 days varies with the bank workload & responsiveness of the borrower for homebased
businesses and locations being rented from a landlord.
5. Working Capital – Neighborly, Garage Living, Patrice & Associates, Fibrenew, Naturals 2 Go &
Ace Handyman Services
• Loan Amount – The SBA Express Loan provides working capital up to $150,000 for a home-based
business and an existing business.
• Collateral – Business collateral only
• Restrictions – This loan cannot be used for business acquisitions, purchasing real estate and for
construction.
6. Real Estate Mortgages – Yogi Bear’s Jellystone Parks & Kampgrounds of America (KOA)
• Loan Types – The SBA 7(a) loan ranges up to $5,000,000 and the SBA 504 loan ranges up to
$10,000,000.
• 2 Step Loan Process – SBA 504 loans are first approved by the lender and then approved by the
regional Community Development Corporation. SBA 7(a) loans are approved by most SBA lenders
in one step
• Use of Funds – The loan will finance up to 90% of the real estate purchase & the development costs.
• Equity injection – Ranges from 10% to 20% of the purchase price depending upon lender & the
financial strength of the borrower.
• Qualification Rule – The business must occupy at least 51% of the usable space which provides an
opportunity to lease up to 49% of the usable space.
• Terms and Conditions – Same as above with the following exceptions:
• Repayment Term – up to 25 years. Fully amortized loan repayment with no balloon payment
• Prepayment – Prepayment penalties range from 1-4% over the initial 3-4 years of the note.
• Interest rate – Variable rate calculated by adding the prime rate as published in the Wall Street Journal plus a risk premium capped by the SBA at 2.75%.
Note: SBA 504 loans typically have lower interest rates than SBA 7(a) loans.
Option 2:
USDA Loans ($250,000 up to $25,000,000) – Yogi Bear’s Jellystone Parks & Kampgrounds of America (KOA)
This national program is designed to provide loans to for-profit entities, nonprofits, cooperatives,
federally recognized tribes, and public bodies, given they are in a city or town with a population under
50,000. The USDA offers loan guarantees from 60% to 80% depending on the loan size.
• Use of Funds – purchase real estate, machinery, and equipment. Development costs, working capital
and franchise fees can be included
• Repayment Term – 30 years
• Interest rates – May be fixed or variable rates as negotiated between the borrower and lender,
subject to USDA approval. USDA loans typically have lower interest rates that SBA loans.
• Qualification Rules –
• Once a location is identified; eligibility is determined by inputting the address in the USDA
Property Eligibility Website
• Environmental studies are required that follow NEPA regulations
• Feasibility studies are required for new businesses
• 2 Step Loan Process – Loans are first approved by the lender and then approved by the USDA
district office up to $10,000,000.
• 3 Step Loan Process – Loans over $10,000,000 are first approved by the lender, then approved by
the USDA district office and sent to the USDA national office for approval.
Option 3:
Equipment Financing ($5,000 up to $2,000,000) – Garage Living, Smash My Trash, Red
Box +, United Franchise Group’s storied franchises (Signarama, Experimax and Fully Promoted), F45 Training, Athletic Republic, The Camp Transformation Center & HOTWORX.
One of the main benefits of equipment leasing is that these transactions are completed much faster than
SBA and USDA loans. There are two products: equipment leases and equipment finance agreements. The
lender owns the equipment when an equipment lease is used. The borrower owns the equipment when
an equipment finance agreement is used.
• Use of Funds – Any equipment needed to operate the business which can include signage, point of
sale systems, furniture, vehicles, and tools.
• Interest rates – Fixed rates vary by the borrower’s financial strength, time in business and industry
experience.
• Collateral – The equipment package being financed.
• Equity injection – The down payment or security deposit ranges from one lease payment up to 20%
of the dollar amount being financed, depending upon the useful life of the collateral.
• Repayment Term – Ranges from 3 to 7 years.
• End of Term – Once the equipment lease is paid, the ownership of the equipment is transferred to
the company leasing the equipment.
Option 4:
Unsecured Personal Loans ($25,000 up to $250,000) The Graze Craze & HOTWORX
Unsecured personal loans are used to provide working capital, and combined with an equipment lease,
are for clients not interested in or eligible for SBA loans. One of the main benefits of personal loans is
these transactions are completed much faster than SBA and USDA loans.
• Use of Funds – The funds are unrestricted and can be used for any purpose.
• Repayment Term – 5-7 years
• Interest rates – Fixed rates varying from 6% – 10% depending up the borrower’s credit score and
annual income.
In conclusion, there are many capital options available for franchisees, both starting their first location,
and growing an existing business—it just depends on each individual situation as to what option is the best.
Also contact:
Marisol Cruz, COO | [email protected] | (954) 613-6390
Gary Raffensberger, Director of Operations | [email protected] | (954) 494-5944
Stephen Indictor, Business Development Director | [email protected] | (561) 309 8012
Frank Young, Director of Finance | [email protected] | (561) 308-5996
Paul Bosley is a Managing Member of the Business Finance Depot (www.businessfinancedepot.com)
