Franchisees, like all small businesses, have capital needs that come in many forms. Whether it’s planned growth, time sensitive opportunities, or franchisor updates to your business—all require capital.
In the past, the traditional route to capital was to attain a business loan through a bank or to finance business capital through personal credit. Today, there are more options for small business owners to explore financing their franchise, including the merchant loan.
What is a merchant loan?
A merchant loan is a short-term loan designed to meet the needs of Main Street businesses, including franchisees.
Merchant loans are unique in their attainability and speed, and most loans are funded in a matter of days after an application is completed.
Merchant loans don’t require collateral, which makes them a particularly good choice for Main Street business owners because their businesses typically don’t have significant amounts of collateral and they understandably are reluctant to pledge personal assets for a business loan.
In terms of documentation, most merchant lenders only require the last few months of a franchisee’s credit card statements along with a one or two page application. This simplified application process is ideal for busy owner-operator franchisees.
How is a merchant loan different from a bank loan?
Business loans from banks are usually secured by some form of collateral like property, cash reserves, or other personal assets. In contrast, merchant loans do not require collateral and therefore approval isn’t tied to the value of the business or personal assets.
Merchant loans are designed to be short term in nature; as opportunities arise, business owners take out a merchant loan and pay it back in a matter of months, unlike bank loans, which typically have repayment in terms of 3 years or more. Due to the short-term nature of a merchant loan, lending amounts are usually smaller compared to a bank loan, and are designed for a specific purpose such as renovation, growth, or paying franchisee fees.
Merchant loans also differ from bank loans in their repayment structure. Rather than require a large fixed monthly payment, merchant lenders offer a more manageable daily payment that is either a fixed dollar amount or a fixed percentage of each day’s credit sales. The latter option works particularly well with a business’ cash flow because repayment rises and falls with daily sales levels.
Is a merchant loan right for my franchise?
A merchant loan may be the right option for your business if:
1) You have a time sensitive need for financing. Merchant loans fund faster than other forms of financing.
2) You do not want to use personal assets to obtain a business loan. Merchant loans do not require collateral, either business or personal.
3) You want an easy, straight forward application process. Merchant loans have a simpler application process that saves many hours of your time compared to a bank loan.
4) The revenues from the financing will have an immediate impact on your business. The short-term nature of the merchant loan means that your business pays off the debt faster, giving you the capacity to borrow in the future if necessary.
The bottom line is that if you’re looking for funding to grow your business, and need it in a timely manner, a merchant loan may be right for you. The good news is that there are numerous options for you and your franchise, so always consider and explore all of your options to make the best choice.
Craig Coleman is co-founder and CEO of ForwardLine. Founded in 2003, ForwardLine was the first company to offer a merchant loan in America. Today, using their proprietary loan origination platform and small business credit algorithm, ForwardLine provides financing that is fast and simple to thousands of U.S. small businesses every year.