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SBA Loans for Franchises: How Can You Get One

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The Small Business Administration (SBA) offers financing solutions for entrepreneurs who want to open their own franchise but need to overcome the high financial entry barrier. An SBA loan for franchise owners can be used to finance initial startup expenses, such as working capital, securing real estate and purchasing equipment.

SBA loans are not issued directly to the franchise owner — rather, various financial institutions across the country finance the loans. However, only business owners whose franchises are listed in the SBA franchise directory can apply. The listed franchises operate business models that meet the SBA’s eligibility criteria.

SBA loans for franchises

There are various types of SBA loans available, each with its own terms, rates and purposes. Here are two common options available to franchise owners:

SBA 7(a) loans for franchises

The 7(a) loan program is the SBA’s flagship product for general financing. Franchise owners can use this loan for purchasing real estate, fixed assets, working capital and even refinancing existing debts. With amounts available up to $5 million, business owners can use it as a loan to start a franchise and cover initial startup costs.

Terms for a 7(a) loan can extend up to 25 years but will vary depending on the franchisee’s intended use of the proceeds. Interest rates can be either fixed (up to 11.25%) or variable (up to 8%).

SBA 504/CDC loans for franchises

Unlike the general-purpose 7(a) loan, the 504/CDC loan program is for securing major fixed assets, such as machinery and equipment, and can be used for purchasing real estate and remodeling buildings, too. A restaurant franchise owner, for example, may use a 504 loan to purchase commercial kitchen equipment. The 504 loan’s maximum amount for the CDC portion is $5 million, with terms extending up to 25 years.

The 504 loan structure consists of three parts: 40% funding through the 504/CDC denture, 50% from the third-party lender and the remaining 10% from the franchisee. The interest rate for the CDC portion is fixed and is tied to the current market rates for five- and 10-year U.S. Treasury. The third-party lender portion can be fixed or variable and is the lesser of 9.25% (based on the prime rate) or the maximum interest rate permitted in a given state. The SBA’s loans require that one job must be created or retained for every $75,000 borrowed, too.

How to apply for an SBA loan as a franchise owner

The steps for applying for an SBA loan are similar to any other applicant with one exception: You must first verify your franchise brand is eligible for SBA financing.

Confirm your franchise is eligible for SBA financing

Review the SBA franchise directory on the SBA website to determine whether your franchise is eligible for financing. When SBA franchise lenders review your documents, they will also reference the directory to confirm your eligibility.

If a brand is not listed in the directory, consider asking the franchiser if they have plans to be listed. The directory is updated weekly and there are no application fees.

Choose a loan type and lender

Each SBA loan program has its pros and cons. Your financing needs will help determine which program is ideal for your situation. One restaurant franchise owner may benefit from using the specialized 504/CDC loan to finance major fixed assets, such as commercial equipment, while another franchisee may use the 7(a) loan to cover general expenses, like inventory and supplies.

Keep in mind that the SBA does not issue loans directly to franchise owners — you’ll need to apply through SBA-approved lenders. The SBA’s Lender Match Tool can help connect you with qualified lenders in your area.

Gather your documents

The documentation requirements will vary by each lender. Generally, you’ll supply the following documents:

  • SBA loan application form (Form 1919)
  • Copy of a signed franchise agreement
  • Statement of personal history
  • Personal financial statements
  • Business financial statements, such as current profit and loss statements and a one-year financial projections statement
  • Documentation of any subsidiaries and affiliates
  • Original business license or certificate of doing business
  • Records of loans you previously applied for
  • Personal and business income tax returns
  • Personal resume
  • Explanation of how an SBA loan will support your business
  • Copy of business lease

The SBA franchise directory will also specify whether you will need to submit Form 2462, an addendum to the franchise agreement that states that any signed document related to control by the franchisor or franchisee will not apply during the term of the SBA loan. If you intend to operate multiple franchise units, you may need to supply a separate form for each location.

Depending on the loan and amount, the lender may require you to provide a personal guarantee, which holds you liable for repaying the loan if you default on your payments. Alternatively, you may need to secure the loan with collateral — if you fail to repay the loan, then the lender can exercise its right to seize the collateral to recoup its loss.

Submit your loan application

After submitting your loan application, some lenders may have additional questions or request additional documentation. Be sure to review all the essential details, such as the interest rate and repayment terms, before accepting a loan proposal. Some SBA lenders may require a 20% to 30% down payment, depending on whether you are purchasing an existing franchise unit or opening a new location. Our SBA loan calculator can help you estimate how much your monthly payments will be.

Generally, the process for securing an SBA loan for franchise owners can take two to three months. It’s possible to shorten the timeline by working with an SBA preferred lender — these lenders have the authority to make final decisions on loan applications instead of waiting for approval by the SBA.

Alternative franchise financing options

If you want to explore franchise business loans beyond the SBA, then consider the following options.

Loan from the franchiser

Depending on the franchise, the franchiser may offer in-house financing. You’ll usually find details about this on Item 10 of the franchise disclosure document, a comprehensive document about the franchise system that the franchiser must give you. Similar to traditional lenders, the franchiser will review eligibility factors, such as your credit score, net worth and how much liquid capital you have available.

While securing financing directly from the franchiser can be convenient, it’s often worth shopping around with different lenders for the best terms and rates. If the franchiser doesn’t offer direct financing, you can still inquire about funding — some franchisers have preferred lending partners you can use.

Short-term business loans

Some financial institutions offer short-term business loans, which are financing solutions with shorter repayment terms — typically three to 18 months. Franchise owners can use short-term loans for multiple purposes, including cash-flow gaps and working capital.

Unlike SBA loans, which may take months to fund, some online lenders fund as quickly as the same day — ideal for franchisees that may need capital quickly. However, you will likely pay far higher interest rates than you would with an SBA loan. Also, repayment for short-term loans tends to follow a more frequent payment schedule, sometimes requiring weekly or even daily installments.

Traditional bank loans

Like the SBA, traditional banks can offer various financing products in generous loan amounts that best suit your needs. Some banks carry general business loans you can use for multiple expenses, including business expansion and facility renovations. Banks offer specialized financing, too, such as equipment loans, which can help you purchase essential equipment for your franchise.

Similar to the SBA, traditional bank loans are often attractive financing solutions because their competitive interest rates help keep costs low. However, traditional bank loans also tend to enforce strict eligibility requirements, which can make it difficult for inexperienced franchisees to qualify.

 

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