How to Get an SBA Franchise Loan for Existing 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 Small Business Administration (SBA) franchise loan 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 a 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 the details surrounding SBA franchise loans and why they could suit your business.

How the SBA Defines a Franchise

The SBA has a Franchise Directory that includes all franchises and other brands eligible for SBA financial assistance. In the United States, the SBA administers a unique variant of franchise lending, known as SBA lending, which takes into consideration the affiliation of the franchise. This method of lending comes with certain preset qualifications or requirements from the lender. The franchiser must meet the Federal Trade Commission (FTC) definition of a franchise and must be listed in the SBA Franchise Directory to establish eligibility for financial aid. The FTC categorizes a franchise as any enduring commercial relationship wherein:

  1. The franchisee will obtain the right to operate a business associated with the franchisor’s trademark, a key factor in any franchise business strategy.
  2. The franchisor has significant control over or can extend substantial assistance to the franchisee's operations.
  3. As a prerequisite for commencing the franchise, the franchisee makes a required payment to the franchisor or agrees to do so.

To assess the suitability of businesses for SBA loan funding, lenders and certified development companies utilize the Franchise Directory. These certified development companies, serving as partners in SBA lending, play a critical role in fostering economic development within their locality. If direct finance is off the table by the franchiser, the franchisee can investigate potential financing options. There may be a chance that the franchiser might have a preferred franchise lending partner.

SBA Franchise Business Loan Options

Franchise owners can consider two different SBA loan programs: SBA 7(a) and 504. 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.

1. SBA 7(a) Loan

Unlike many other traditional lending options, the 7(a) loan is based on future projections. Indeed, the income projection and cash flow projections are critical aspects of the SBA 7(a) loan. This is particularly true when applying via the SBA lender match program, a useful tool for both new and existing franchise owners seeking small business financing or wishing to refinance, enhance working capital, or stimulate business growth.

One appealing feature of the 7(a) loan is its typically lower down payments, extended funding timeline—repayment terms of up to 10 years—and a maximum cap at $5 million, presenting competitive interest rates. Alternatively, you might also consider the Veterans Advantage Program, providing veterans with subsidized fee loans. However, be prepared for extensive documentation requirements, which, at times, can be the most tedious part of the SBA application.

Despite the attractiveness of the 7(a) loan, it carries a significant caveat: Lenders require you to offer your real estate as personal collateral. For the entirety of the loan repayment period, restrictions are put in place against selling or purchasing new real estate. Remember, SBA loans, be it a 7(a) or an SBA Express, obtained through the SBA lender match tool, may necessitate other forms of collateral as well.

2. SBA 504 Loan

Like the 7(a) loan, another popular option for franchises is the 504 loan. Also known as the CDC/504 loan, this option is a favorite for franchises looking to purchase inventory or upgrade machinery and equipment.

Not only can these business owners acquire assets at below-market costs, an economic benefit typically linked with significant equity but they can also play a vital role in promoting local economic development through their Certified Development Companies (CDCs).

Unlike the 7(a) loan, however, the 504 loan comes with specific limitations set by the SBA, mainly restricting its usage for financing new franchises or other undefined areas. It is noteworthy that one may have a better chance of securing this type of loan if they have invested equity, or maintains good credit history.

SBA Franchise Business Loan Options

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, knowing your franchise financing options is crucial.

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. With our team's expertise in the field, we can confidently say that the SBA will only consider businesses with a strong credit history or owners with stellar personal credit history. The accuracy of your credit is critically important. If you’ve been meticulously working to build your business credit over the past few years, an SBA loan might be the perfect funding opportunity.

2. Cover Startup Costs

Another excellent reason for franchise owners to use an SBA loan is that it can cover starting costs. Being well-aware of the crucial franchise documents, paperwork is instrumental in obtaining these loans, as they are part of the franchise review process. Buying and running a franchise has its similarity to starting any other venture, meaning many upfront costs exist. The franchise loans lending would aid in this regard by addressing the following startup franchise costs:

  • Real estate purchases or renovations
  • Business Insurance
  • Equipment procurement or upgrade
  • Employee hiring and training
  • Furnishings
  • Marketing materials

It's important to note that the franchise's ownership structure might impact your financing needs and eligibility requirements for the loan. If you have always desired to own a franchise but face financing hurdles, SBA loans, with their collateral requirements and various financing products, can be of significant help.

Ensure that you meet their business eligibility requirements, including the SBA's unconditional personal guarantee from anyone with 20% or more ownership in the business. This financing can be a beneficial solution for any franchise business owner that needs help getting started.

3. Use for Almost Any Expense

The costs aren't done once you've started your franchise. In fact, closing on your starter franchise only marks the beginning of continued expenses you'll likely need to cover, such as:

  • Wages
  • Taxes
  • Inventory
  • Fixtures
  • Leases

These are amongst the most significant commitments of your budget and crucial points that need to be carefully detailed in the application paperwork for an SBA loan. It's not just about starting your franchise, ongoing costs will also be a part of the journey. SBA loans, in this context, become one of the most handy and adaptable aids that can cater to almost any expense necessary to buy, operate, or expand your franchise.

The funds from SBA loans can be utilized not only for kickstarting a new franchise, buying an existing one or facilitating expansion, but also for costs imparted by franchising such as construction soft costs or daily operational expenses. Many entrepreneurs find it invaluable to stabilize and maintain the operation with business capital and employee training using the SBA loans. In addition, navigating the closing period may require answering additional queries and requests from the lender, further emphasizing the practicality of these loans.

Whether you're a new franchise owner needing funds for employee training or an experienced businessperson looking to expand, your timely response to these requests during the closing period will enhance the chances of your SBA loan application. Appropriately used, these loans can exhibit the quality of "patient capital," permitting a blended use of funds - making them a prime choice in franchisor financing.

4. Many Franchises Are Already Approved

If your franchise is already on the SBA's list of approved franchises, securing a loan will be much easier for you. The benefit here lies in the name of your franchise. Because these franchises have already worked with the SBA and secured sponsorship, they meet a predetermined set of criteria.

Check the list to see which franchise names are available. With new businesses constantly being approved and added as time goes on, it's recommended to consider consulting a financial advisor for more specific guidance tailored to your situation.

5. Grow Your Operations

As you read above, the funds from an SBA franchise loan can be used to grow your operations. The additional benefit arises from the fact that if the franchiser doesn't offer direct financing, excess funds may be available through other preferred lending partners. This significantly enriches the lending pot, offering a considerable advantage to franchise owners, as many have owned multiple franchise locations over time.

Indeed, numerous small business owners have employed such excess funding from SBA loans to finance a new franchise location. Ready to transform your business landscape? 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 essential detail every franchise owner should bear in mind is that SBA loans offer substantial franchise financing - covering up to 80 to 90% of project costs, which is significantly higher than traditional loans. These loans often come with set terms of up to 10 years and minimal down payment requirements.

Suppose your franchise is anticipating a large-scale project such as real estate acquisition, remodeling, expansion, or constructing a new business location. In that case, an SBA loan might be just the financial solution you need. In two business days, you could receive an email with possible lender matches via our website, thus enabling your business to secure a substantial sum that can comfortably cover your project costs. Interest rates tend to be more favorable than traditional loans, leading to agreeable repayment terms in many cases.

6 Reasons to Use an SBA Franchise Loan

Other Loans a Franchise Owner Can Consider

If you were denied an SBA loan or are still wondering about obtaining financing for your franchise, other options exist. Many online lenders offer more flexible financing options than banks or SBA loans. Traditional bank loans often have 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 know all the options before deciding 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 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 needed or 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 funding that advances future sales at a discount to the franchise. You then have to pay a fixed payback 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 give every franchise business owner a lot to consider. SBA loans can be the perfect choice for franchise financing, especially if your franchise business seeks capital but prefers low-interest rates and specific lenders backed by the government. While other business loan products are potential options, identifying a loan type appropriate for franchise fees, can provide apt financing for your franchise.

Decide on a loan amount and initiate your loan application process today. The application is speedy, especially with an online lender such as AdvancePoint Capital. Get a quote today and gain access to working capital in no time.

Jacques Famy Jr

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