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Many franchisees search for funding from multiple sources, even if they only do so to have a backup for the typical ups and downs of a business. Usually, they end up looking at avenues such as loans from family and friends, retirement savings, credit cards and personal savings to fund their new venture. These days, traditional lenders have grown wary of new businesses, so qualifying can be difficult, and doubly so when there is no existing business yet and therefore no history.
With unproven business plans, many prospective franchisees now turn to online financing as a potential means of getting the funds needed to get off of the ground. If you are or will be considering the online route, here's what to know.
An online loan offers quite a few advantages over loans from a traditional lender. The process is usually faster, for example, on both the response and processing ends. Some applications can be done in under 30 minutes, and you may be able to get a funding decision instantly if your income, credit score and loan request align with the lender's underwriting at the time of the application. Because of the streamlined process, you are also able to compare offers from multiple lenders in a much shorter time frame than you would with traditional lenders.
There's a chance the online lenders you are considering offer lower transaction fees. Generally speaking, an online lender does not have the same level of overhead as a typical bank, and they pass those savings onto customers so they can attract more people and build the business. Non-traditional lenders also tend to offer more options, going beyond basic bank accounts and into a wider variety of loan options.
The interest rate on a loan from an online lender is likely to be higher than a traditional bank. While they don't have the same level of overhead as a physical bank, they are still making a fast decision based on your finances and credit score, and they may view you as a greater risk. In addition, without physical locations, you will always be left with non-face-to-face methods--such as calls and emails--to handle any issues.
Try to work out a financial plan that involves as little lending as possible for your franchise, but if you find you are short on your start-up funds, going the online route could be the answer. As you would with any other financing decision, make sure you know and understand all the loan terms before you agree to any offer.