6 Reasons Why an SBA Franchise Loan Is Right for Your Business

Business Expansion

Jacques Famy Jr
Review By Todd Millman

Are you ready to open a franchise but lacking the proper funding? Or maybe you already own a couple of franchises and want to expand your enterprise? A franchise loan from the Small Business Administration (SBA) might be right for you. There are many benefits to franchises using SBA loans, including the ones explored in this article.

An SBA franchise loan is right for your business if:

  • You have great credit score or a few years in business.
  • You need help with startup costs.
  • You have other expenses you need help covering.
  • You are one of the franchises on the pre-approved list.
  • You want to grow or expand your operation.
  • You need a large percentage of your project financed.

Before you decide to use an SBA loan for your franchise, you'll need to know the different kinds of SBA loans available and what you can use them for. Many franchises offer in-house funding, which can be found in the franchise disclosure document. However, these aren't always the best option for franchise funding. This article will explore all of the details surrounding SBA franchise loans and why they could be suitable for your business.

How the SBA Defines a Franchise

The SBA has a Franchise Directory that includes all franchises and other brands that are eligible for SBA financial assistance. Because the franchise system is different from other business models, it has additional requirements. SBA has affiliation rules and other eligibility criteria by which they judge businesses. If a brand meets the Federal Trade Commission (FTC) definition of a franchise, it must be in the SBA Franchise Directory to obtain financing. The FTC defines a franchise as any continuing commercial relationship wherein:

  1. The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark;
  2. The franchisor will exert or have the authority to exert significant control over the franchisee’s operations, or provide significant assistance in the franchisee’s operations;
  3. As a condition of commencing operation of the franchise, the franchisee makes a required payment to the franchisor, or commits to do so.

Lenders and the Certified Development Company use the Franchise Directory to evaluate the eligibility of businesses for SBA loan funding.

SBA Franchise Business Loan Options

Franchise owners can consider two different SBA loan programs: the SBA 7(a) loans and the 504 program. As mentioned, the SBA has a Franchise Directory which lenders use to confirm if your franchise is eligible. If your business is on this list, these loans could be an excellent financing option. SBA franchise loans are unique in their own right because the U.S. government backs them. Continue reading to learn more about each type of loan.

7(a) Loan

 Unlike many other traditional lending options, the 7(a) loan is based on future projections. That’s why the SBA’s 7(a) loan is an excellent option if you’re opening a new franchise or for existing franchises that want to refinance, gain working capital, or expand their business.

A good thing to note is that the 7(a) loan typically has lower down payments than other loans with a repayment term of up to 10 years. This long-term loan option has a maximum amount of $5 million with competitive interest rates. You can also opt into the Veterans Advantage Program, which gives veterans loans with even more reduced fees. 

Although the 7(a) loan is a great franchise option, there is a significant disadvantage: Lenders will tie up your real estate as personal collateral. You can’t sell your home or buy a new one while repaying this loan. SBA loans like this one may require other types of collateral as well.

504 Loan

Like the 7(a) loan, another popular option for franchises is the 504 loan. This is a great franchise loan because business owners can use it to purchase assets, like property and equipment, at below-market costs. But unlike the 7(a) loan, the 504 loans can’t be used for financing new franchises because the SBA sets specific limitations for what the funds within the loan can be used for.

financing franchises

6 Reasons to Use an SBA Franchise Loan

Now that you know more about SBA franchise loan options, let's discuss six reasons your franchise should use one. Before you make financial commitments or sign any franchise agreement, it's crucial to know what your franchise financing options are.

1. Good Credit Scores Accepted

SBA loans are perfect for your business if you have established good creditworthiness or have a few years in business. SBA will only consider businesses that have a strong credit history or business owners with stellar personal credit history. If you’ve been working to build your business credit over the past few years, an SBA loan might just be the perfect funding opportunity for you.

2. Cover Startup Costs

Another excellent reason for franchise owners to use an SBA loan is because it can cover starting costs. Anyone familiar with franchises knows that starting one isn't always a walk in the park just because there's a well-known franchise brand to back you up. Buying and running a franchise is like starting any other business, which means there are many upfront costs. Startup franchise costs can include:

  • Real estate
  • Business insurance
  • Equipment
  • Employee hiring and training
  • Furnishings
  • Marketing materials

If you've always wanted to own a franchise but don't know where you'd get the funding, SBA financing can help. Any franchise business owner that needs help getting started can turn to SBA loans.

3. Use for Almost Any Expense

The costs aren't done once you've started your franchise. There will be ongoing expenses that you'll need to take care of, such as:

  • Wages
  • Taxes
  • Inventory
  • Equipment
  • Facility upkeep

Keeping your franchise going will require the proper funds. SBA loans are one of the most flexible loans available and can be used for almost any expense necessary to buy, operate, or expand your franchise. Using the funds from your SBA loan for whatever you need is one of the many reasons why it's an excellent loan option for franchises to consider. Typically, there are three common uses for these funds:

  1. Starting a new franchise
  2. Purchasing an existing franchise
  3. Expansion

Of course, the funds don't have to be used for one of these three things. That's the beauty of an SBA franchise loan - how you use it is up to you. Many small business owners opt to use the funds in the following ways:

  • Build a solid financial foundation for your business
  • Resolve cash flow issues
  • Pay soft costs relating to construction
  • Purchase equipment
  • Buy commercial real estate
  • Cover startup or operational expenses
  • Maintain operations with business capital
  • Employee training
  • Buy supplies and marketing materials
  • Buy inventory

How you use your SBA loan will depend on the stage of business. As a new franchise owner, you might need funds to cover employee training or wages. If you're more experienced and looking to expand, an SBA loan can help you too. Whatever the reason you need funding, SBA loans are a great option for franchisor financing. Because the loans are "patient capital," there is the ability to have a blended use of funds for one loan.

4. Many Franchises Are Already Approved

If your franchise is already on the SBA's list of approved franchises, then the process for securing a loan will be that much easier for you. Because these franchises have already worked with the SBA and secured sponsorship, they already meet a predetermined set of criteria. Check the list to see which franchises are available. New businesses are constantly being approved and added as time goes on.

5. Grow Your Operations

As you read above, the funds from an SBA franchise loan can be used to grow your operations. This offers a considerable advantage to franchise owners, as many own multiple franchise locations over time. Many small business owners have used funding from SBA loans to finance a new franchise location. Cover the cost of buying real estate, new equipment, and more with an SBA loan.

6. Finance a Large Percentage of Projects

There are many advantages to SBA loans for franchises. One final reason why every franchise owner should consider an SBA loan is because they offer franchise financing for up to 80 to 90% of project costs. This is a much larger percentage than traditional loans. Plus, the terms are typically set out for up to 10 years, and there is a smaller down payment requirement.

If your franchise has a large project coming up, such as purchasing real estate, remodeling, expanding, or building a new business location, then an SBA loan might be right for you. Your business could receive a large sum of money that can help you easily finance your project. Interest rates are usually lower than traditional loans, and the repayment terms are often very agreeable.

franchising loan options

Other Loans a Franchise Owner Can Consider

If you were denied an SBA loan or are still wondering about obtaining financing for your franchise, there are other options to consider. Many online lenders offer more flexible financing options than a bank or SBA loan. Traditional bank loans often come with a higher interest rate range, a lengthy application process, and stricter qualifications.

Thankfully, an alternative lender can help your business with numerous financing options available. Whether you need an equipment loan or funds to cover franchise fees, financing is available that beats conventional loans. Discover additional small business loan products for franchise owners below. Aspiring franchisees should be aware of all the options before they decide which is best for their situation.

  • Long-Term Loans: A long-term business loan offers a lump sum of money, which can be paid back over a term of more than two years. The business loan application will typically require plans for the loan funds and sometimes ask for a copy of your business plan.
  • Short-Term Loans: A short-term business loan is similar to its long-term counterpart, but the repayment terms are typically 6-18 months. If you have a good credit score you can get short-term loans at a prime rate, but they’re also accessible for those with poor credit.
  • Equipment Financing: Equipment financing allows businesses to purchase or lease new equipment while using the actual equipment as collateral.
  • Business Line of Credit: A line of credit allows business owners to draw on funds when they need them or to make purchases. They have a set limit that cannot be exceeded.
  • Business Credit Cards: Business credit cards work the same as personal ones, allowing your company to make necessary purchases or payments when needed.
  • Business Cash Advance: A business cash advance is a type of funding that advances future sales at a discount to the franchise. You then have to pay a fixed payback amount greater than the amount that was advanced to you.
  • Merchant Cash Advance: A merchant cash advance is similar to a business cash advance, but the repayment process is connected to future credit card sales. A set percentage of these future credit card sales will be taken until the advance is paid back in full.

Choosing an SBA Loan for Your Franchise

The six reasons discussed in this article provide every franchise business owner with a lot to think about. SBA loans can be the perfect choice for franchise financing, especially if your franchise business is in need of capital, but you want low interest rates and specific lenders backed by the government. Other business loan products are possible, too.

Though some loans cannot be used for franchise fees, there is a business loan type out there that offers the right kind of funding for your franchise. Decide on a loan amount and start filling out your loan application today. The application process is speedy if you choose to go with an online lender like AdvancePoint Capital. Get a quote today and gain access to working capital in no time.

Jacques Famy Jr
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Jacques Famy Jr

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