Using Working Capital Loans for Franchise Financing

Finding the right financing for your franchise business can be difficult because its unique operational model often requires flexible cash that many traditional loan programs are not built to provide. Most business loans from banks and other traditional lenders are given for specific asset financing goals, and they use the assets in question as collateral. Some more flexible options like credit lines exist, but the application requirements are just as stringent for those as for the loans. Franchise financing with working capital loans, however, is not only possible but often the best option.

What Is a Working Capital Loan?

Short-term loans that are designed to provide you with flexible operational capital are called working capital loans. The funds can be put to any purpose, which makes them great for the final phase of franchise setup when you need to pay vendors, bring in equipment, and keep up with a lease. They are also great for cash flow management when you are up and running, making them a flexible product you can use as needed.

Using Working Capital Loans

The key to using a loan like this is to look at each financing round as an operational budget for the term of the loan. Your goal is to pay it off early because that makes the rest of the budget term profit while it reduces the interest you pay on the loan. There are a few types of loans that provide this kind of flexibility, and the right choice is often a matter of which assets you have available when you need franchise financing.

Asset Loans

Operational asset loans are a type of working capital loan based on an existing piece of real estate in your investment portfolio. They have lower LTVs than commercial mortgages and terms between three and seven years in most cases, but they provide cash-out financing you can use for any purpose. That makes them ideal for owners who have a piece of real estate available with a large sum of equity in it.

Equipment-based asset loans and vehicle loans also exist if you find the right program, but they are a little more difficult to access because most lenders focus on real estate collateral.

Asset-Based Financing

This type of working capital loan uses your business assets, not your tangible assets like real estate or equipment. Invoices, inventory, and merchant account income are common business assets you might see used in asset-based lending programs, sometimes individually and sometimes in groups. This form of franchise financing is both accessible and reusable, so many companies begin with something like an inventory loan and work from there.