This is the core of evaluating your franchise options. This is the work that needs to be done first before looking at the 3,000+ franchise options. I suggest you start with a resource to check your current credit score, CreditKarma.com. They don’t require a cancellation after seven days, so you won’t be charged, it’s actually free and reliable (see their FAQ).

Basically, credit scores are determined by five categories, length of credit history, new credit, other factors, how much you owe, and payment history. Keep in mind that higher scores generally mean lower payments, most lenders will base approval on credit score, and credit scores can range from 300-845, the higher the better.

Next, let’s discuss who lends money for startups and businesses. First, the SBA 7a program does not lend money but rather guarantees part of the amount loaned. Loans can range from $5K up to 5M with a prime+2.75% on 5-10 year terms. Collateral will be determined by creditworthiness and loan amount requested, it is highly unlikely that anyone will receive 100% financing. The SBA will also review and scrutinize the franchisor to ensure that it complies with all SBA lending guidelines. The SBA has looked unfavorably on franchise concepts that require strict controls on franchisees. The next option for financing your business could be a home equity loan where the house is used as collateral. The benefits are low cost, quick response, and low interest rates. Here, the lender is calculating the loan-to-value ratio, which is the amount you owe minus the principal, at about 85% of the loan-to-value to arrive at how much to lend.

Next, unsecured loans where the equipment is used as collateral and the interest rates are higher. Securities-backed loans are where CDs, stocks, bonds, and other securities (outside of retirement plans) are used as collateral. Here, up to 70% of the value of the security can be loaned with a generally low interest rate and a fairly fast turnaround time.

A very viable financing alternative is a 401K-IRA Rollover plan, in which more franchises are started with retirement funds than with SBA loans. In general, there is a response time of 10-20 business days, regardless of credit rating. These instruments are financing resources free of taxes, fines and debts and best of all, the government assumes up to 40% of the risk! This option is structured as an investment, not a loan with no loan payment (benefit before). We have seen higher success rates using this financing approach that will not affect your debt ratio or credit score. There are exit strategies and tax benefits built in and you can also receive a salary from the funds. This product was created to help bridge the financial funding gap between SBA funding and the other funding options listed above. Each client will need a specific analysis to determine their financing factors.

This is a complex matter that deserves the attention of experienced franchise loan professionals. My best advice is to start the process early so you can do your due diligence to make an informed and educated financial decision.