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SBA Franchise Loans: How You Can Get One

If you want to jump into entrepreneurship, opening a franchise could be a good way to become a small business owner with the support and name recognition of an established brand behind you.

Franchisees are licensed to run a business under the name of a major company, but not for free. New franchisees must pay upfront fees and meet financial requirements, such as a minimum personal net worth. A down payment is usually required as well, and franchisees are responsible for the cost of equipment.

If you can’t cover these expenses outright, you could apply for a loan from the U.S. Small Business Administration. SBA loans are a common financing option for new franchisees. Banks and credit unions administer these government-backed loans, which typically have competitive terms and interest rates.

If you’re considering an SBA frachise loan to finance your new franchise, here are the options available to you.

SBA franchise loans

Only certain franchises are eligible for SBA-guaranteed loans, said Dianna Seaborn, director of the SBA Office of Financial Assistance. The SBA compiles all eligible franchise brands in a directory, and a franchisee’s business must appear in the directory for the business owner to be approved for financing. Check here to see if your franchise makes the cut.

If you are eligible for SBA funding, the following SBA loan programs may be best suited for your franchise.

7(a) loan program

The 7(a) loan is the SBA’s most popular product for small business owners and one of two products offered to franchise owners.

The 7(a) loan can be used to cover the cost of property, furniture, supplies and machinery. Loans can be issued in amounts up to $5 million, and the maximum term limit is 25 years. The SBA offers a fixed-rate 7(a) loan, which would include an unchanging interest rate and equal monthly payments, and a variable-rate 7(a) loan, which would include a fluctuating interest rate and varying monthly payments. The maximum interest rate for fixed-rate 7(a) loans is 12.81 percent while the maximum for variable-rate 7(a) loans is the prime market interest rate plus 4.75%.

504/CDC loan program

The 504 loan, also referred to as the Certified Development Company loan, finances real estate and equipment purchases for small business owners. The loan can be used to buy land, existing buildings, machinery or new facilities.

To qualify, franchise owners must have a net income of $5 million or less after taxes during the two years prior to applying. The franchise business must also be worth less than $15 million. 504/CDC loans can be issued in amounts up to $5.5 million with terms ranging from 10 to 25 years. A fixed interest rate is determined when the loan is awarded, though rates are usually lower on these loans than they would be on 7(a) loans.

How to apply for an SBA loan as a franchise owner

If your franchise appears in the SBA’s directory, you could then apply for financing from an SBA-approved lender, Seaborn said. The SBA’s Lender Match tool helps small business owners find nearby lenders that administer SBA loans. More than 800 lenders participate in the program throughout the country. LendingTree can also match you with lenders for your SBA loan.

If you receive multiple matches, you could compare rates, terms and fees to ensure you get the best financing offering for your franchise.

Once you settle on an offer that works for your franchise, you can submit your loan application and additional paperwork. Here’s a checklist of what may be required:

  • Business plan: Most lenders will expect to see your business plan when you first apply for financing.
  • Funding amount: You’ll need to disclose how much capital you need and how you plan to use it.
  • Credit history: Your personal credit score will be used to determine interest rates and your overall credit risk.
  • Financial projections: You’ll have to outline how you plan to pay back your loan to show you have full understanding of your franchise’s finances.
  • Collateral: You may be required to offer collateral such as your home, car, property or inventory to secure the loan.
  • Industry experience: Firsthand industry knowledge may improve your chances of being approved for a loan.

Neither the Lender Match tool nor LendingTree guarantees you’ll be matched with a lender or receive a loan offer, but they may help you get your foot in the door. You’re welcome to reach out to lenders in your community to find out more about the SBA loan application.

When talking with a lender, you should ask about the interest rates they offer, as well as minimum credit score and cash flow requirements. You would also want to understand the prepayment penalties before you sign a loan agreement and if the lender can demand full repayment.

If you need additional help with a loan application or any other questions, the SBA operates 68 local district offices to assist small business owners, including franchisees, Seaborn said. Find your local SBA district office here.

Alternative franchise loan options

If you are not eligible for an SBA franchise loan, here are some other ways you may be able to finance your franchise.

Bank loans and credit

Franchisees might have an easier time than an independent business owner obtaining a business loan or line of credit from a traditional bank. The success of the franchise as a whole would indicate your profitability and ability to pay off debts. Being associated with an established company could reduce your riskiness as a borrower. However, approval for a loan or line of credit would still be based on your credit rating, down payment and form of collateral. Several major banks, including Bank of America and PNC, have specific lending programs for franchise owners.

Loan from the franchiser

Some franchise companies offer financing programs to help new franchisees get started. Companies may offer limited-term loans, a minority stake in the individual franchise or reduced fees or royalties. In-house financing from the franchiser may be convenient, and the company may give you more money than a bank because they better understand the business. However, you should make sure the financing agreement doesn’t give too much power to the franchiser.

Rollovers as Business Startups

If you’re not risk-averse, you may consider using money from your retirement savings to finance a franchise. The Rollover as Business Startups option from the IRS allows you to withdraw retirement money to fund a business venture without facing penalties or taxes. ROBS could be a risky option and you may only want to go for it if you have a substantial amount saved.

What is your likelihood of approval for an SBA loan?

SBA loans are in high demand. Small business owners who may not be approved for traditional business financing may have a better shot at SBA-backed loans. And SBA loans typically have desirable rates and terms.

Because of the appeal of SBA loans, the application process can be lengthy and competitive. The timeline could take two to three months, during which time the SBA will review a business owner’s basic business information, personal character history and personal financial statement.

As a franchise owner, you may have a stronger chance of being approved for an SBA loan than an entrepreneur starting out on their own. You would have a tried-and-true business model from the franchiser, which could lead to success right away. Having the support of the franchise company could lessen your risk as a borrower when applying for an SBA loan.

 

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