Depending upon the amount of money you need to raise, a term loan might be an option to finance the purchase of the franchise.
A term loan is simple: You borrow money and agree to pay this back with interest at a set monthly amount for a set period of time. In general, the following principles apply to a term loan:
As with any loan, the lender will expect you to provide collateral and will also want to see your trading history and future order book to ensure that the business can repay the loan amount. If you are battling to raise the required collateral, read the module What to do when you don’t have collateral.
Expect the business' credit rating to be checked and often they will also check the personal credit rating of the business owners. If you think your credit rating will not be good, read the modules Understanding the Credit Record System and What if you have a bad Credit Record?.
In general, term loan contracts last for 60 months and there could be penalties if you want to pay it back in a shorter time period! So, it is important to match the loan period with the period over which the loan will be used (that is, the term of the franchise agreement).
There are other costs you will need to consider when dealing with a term loan. You will get charged a once-off administration fee – the “origination fee”, as well as a small monthly admin fee (in most cases).
Lenders offer a range of benefits, so make sure you check to see whether your lender offers any of these benefits:
Some lenders allow a business a little grace before starting to pay back a loan - 2 to 3 months generally. The interest on the loan will be added to the principal amount over the grace period, so make sure you check how this will impact on the total amount you have to repay.
If you find that you are going through a particularly bad patch, you can arrange for a payment holiday. In this case, the lender could give you 2 to 3 months break from making repayments. It will be easier to negotiate this if you can prove that the cash crunch wasn't due to bad management. It will also cost you money, so be sure to check the overall cost implications.
In the world of agriculture, it's common that farmers repay their loans in 2 instalments during the year. This allows the farmer to cash in on his/her winter and summer harvests, before he/she has to pay back the lender. Even if you're not a farmer, the principle applies. Lenders are often willing to design the instalment period according to the patterns of whatever business you're in. This might mean making instalments twice a year, or even 4 times a year.
Some lenders offer both equity and loan finance (or a combination of the 2). They may be willing to convert a loan to equity in the event that your business goes through a cash crunch, and is struggling to pay back the loan. Obviously they need to believe that your business will get through the crunch and that their equity investment will be worth money in the long run.
With some term loan products, extra money paid by the business, above and beyond the monthly instalment, can be withdrawn again when the business needs it. However, rules apply and you have to stick to them, such as a minimum amount that can be withdrawn. Alternatively, some lenders will allow you to extend your loan as soon as you've paid off a certain portion of it (usually a quarter of the loan). This saves you from having to fill out another application form, but it doesn't mean that you can simply withdraw money whenever you feel like it. You'll still have to put in a formal application; it's just quicker than the original application process that you had to go through.
If you think that a rise in interest rates will damage your business - ask for a fixed rate. However, bear in mind that you won't benefit if the interest rate drops!
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.