This is the core of evaluating your franchise options. This is the work that needs to be done first before considering the 3,000+ franchise options. I suggest you start with a resource for checking 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, amount 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 to 845, the higher the better.

Next, let’s take a look at who lends money to startups and businesses. First, the SBA 7a program does not loan money but guarantees part of the amount borrowed. Loans can range between $ 5,000 and 5 million with a preferential interest of + 2.75% in terms of 5 to 10 years. The guarantee will be determined by creditworthiness and the amount of the loan requested, it is very unlikely that someone will receive 100% financing. The SBA will also review and screen the franchisor to make sure it meets all SBA loan guidelines. The SBA has viewed franchise concepts that call for strict controls on franchisees unfavorable. The next option to finance your business could be a home equity loan where the home is used as collateral. The benefits are low costs, 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, by approximately 85% loan-to-value to arrive at how much you will loan.

Next, unsecured loans where equipment is used as collateral and interest rates are higher. Securities-backed loans are those in which certificates of deposit, 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 quick turnaround time.

A very viable financing alternative is a 401K-IRA rollover plan, where more franchises are started with retirement funds than SBA loans. Generally, there is a response time of 10-20 business days regardless of credit rating. These instruments are a tax, penalty and debt free funding resource and best of all, the government assumes up to 40% of the risk! This option is structured as an investment, not as a loan without any loan payment (profit before). We have seen higher success rates using this financing approach that will not affect the debt ratio or credit rating. 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 seasoned professionals who work directly with franchise loans. My best advice is to start the process early so you can do your due diligence to make an informed and educated financial decision.