Asset-Backed Financing for Franchise Owners

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A prospective franchise unit owner considers asset-backed financing.

There are many ways to finance the purchase of a franchise unit. One that few aspiring business owners consider for their franchise is asset-backed loans.

Many commercial banks, community banks, and credit unions offer asset-backed loans to people willing to leverage their franchise unit’s assets to cover the costs of startup. Prospective franchise owners may finance their new business’s inventory, machinery, non-mortgaged real estate, or another tangible asset with verifiable value to access this fast form of funding.

 

Why would I choose this approach over another form of financing?

You might consider an asset-backed loan if any of the following conditions are true:

  • You'll need additional capital beyond what you can attain from other financing sources.
  • You don’t qualify for a traditional term loan.
  • You don’t want to put up any personal assets as collateral for financing.
  • The franchise unit you’re purchasing has assets that could be leveraged to achieve your funding goals.

 

Asset-backed loans often have less stringent requirements than traditional term loans. Lenders may consider your financial history and personal creditworthiness, but they’re far more interested in the value of your business assets, which they can use as collateral if you default on the loan.

 

How does this kind of loan work?

Lenders will determine how much money you can borrow by examining the value of your assets. Often, they allow franchise unit owners to borrow up to 50% of the value of their inventory or equipment. Then, depending on your preference, the lender can offer you a revolving line of credit or structure a loan for that amount with a set repayment schedule.

 

Could I lose the assets that I put up for collateral?

Yes. If you default on your loan, the lender will be entitled to seize those assets, liquidate them into cash, and use the proceeds to cover their losses.

Collateral provides a safety net for lenders, so banks often consider them to be lower-risk investments, and they’re more willing to provide this loanؙ than their term loan offerings.

 

How do I apply for asset-backed loans for a franchise?

To start, you’ll need to contact commercial banks, community banks, and credit unions in your area to determine who offers this form of financing. You can also look to online banks, including GoKapital and Commercial Loan Direct, to explore lending options. Ask each institution about their payment plans and terms and the speed of their approval process to determine which lenders can meet your needs.

Next, you’ll gather the financial documents your preferred lender requires to process your application. These documents may include:

  • Franchise balance sheets for the past two years, plus a year-to-date balance sheet
  • Franchise profit-and-loss statements for the last two years and a year-to-date profit-and-loss statement
  • Sales projections for the next three to five years
  • Personal tax returns for the past three years
  • Personal banking statements for the past 12 months

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Then, you’ll need to create a list of your assets and their respective values. If you plan to leverage your inventory, you’ll need to provide an inventory statement. This should include a count of the items you plan to include and each item’s approximate (or appraised) value. If you plan to leverage your new entity’s equipment or machinery, report each item’s age, condition, and resale value.

You will submit these documents and a completed loan application to the lender. The lender will ensure that there are no outstanding liens on your assets by performing a Uniform Commercial Code. They may also have your financials audited by a third-party firm to ensure their accuracy.

After an initial review, most lenders will ask for a preliminary commitment to move forward with the loan process. They may present you with a non-binding offer that includes the loan amount, interest rate, and terms they believe they can provide. To move forward with the process, you must sign a term sheet and, in some instances, pay a due diligence fee for the bank to conduct the rest of its investigation. The remaining steps of the process will include a complete audit of the documents you provided and an in-person assessment of the materials that will serve as collateral for the loan.

If you’re approved for the loan, you’ll be presented with closing documents. Within days of signing and submitting these documents, you should receive the financing you requested.

Important note: Lenders who offer asset-backed loans may perform periodic checks on your assets to verify their value. These checks can occur at any time throughout the tenure of your loan.

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Not sure if this form of financing is right for you? Learn about franchise term loans, SBA 7(a) loans, franchisor financing, and partnership opportunities in this guide:

 

Would you like support through the full process of starting a franchise unit? We can help. Log into your owner’s portal for articles, checklists, and advice you can use to make your venture a success.

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