The concept of purchasing a franchise attracts a whole lot of new business owners, especially since it comes with numerous benefits. Aside from the fact that there is an already existing brand value, customers know about the products and the demand that exists. Also, purchasing a franchise business guarantees that new entrepreneurs can hit the ground running.
Reports have it that around 10.5% of all businesses in the United States are franchises and they represent around 3% of the national GDP. In addition, the entire sector is made up of over 780,000 businesses.
Although there is a viable opportunity for growth in this industry, the barrier to entry is renowned to be very high and this makes it one of the reasons why new business owners strive to acquire franchise loans. Banks are known to be quite cautious when it comes to lending to individuals.
Owing to that, SBA franchise loans become an alternative for these business owners who are finding it hard to obtain conventional small business franchise loans. The Small Business Administration has partnerships with lenders in all 50 states, and this ensures that borrowers have numerous options to pick from when looking to obtain a franchise bank loan.
This is also super ideal for most business owners as the franchise loan interest rates offered on SBA programs are encouragingly lower than those for conventional bank loans. It also makes it possible for business owners to get the financing they need at low-interest rates with long repayment terms.
Best SBA Franchise Loans to Finance your Business
According to experts, the SBA 7(a) and 504 loan remains the best SBA franchise loan options for entrepreneurs.
SBA 7(a) Loans
Have it in mind that the SBA 7(a) loan program is the most popular SBA loan program and a viable option for franchise finance. Note that you can use the SBA 7(a) loan to fund virtually any purpose, such as working capital, equipment, inventory, and more. However, note that SBA 7(a) loans cannot finance ongoing franchise or royalty fees.
Amounts on these loans can reach $5 million with terms from 10 to 25 years. The interest rates on SBA 7(a) loans are most often determined by the bank lender you work with, however, the SBA tends to stipulate maximum rates—and your interest rate will more or less fall between 7% and 9.5%.
When put in contrast to franchise loans from alternative lenders, it can be genuinely challenging and time-consuming to qualify for an SBA loan; howbeit, note that these loans will offer very considerable rates and terms (second only to traditional banks). Owing to that, if you are seeking a flexible solution for franchise financing, you will want to consider an SBA 7(a) loan.
SBA 504/CDC Loans
Unlike the 7(a) loan, these loans are meant to be used for very particular purposes—such as purchasing or renovating fixed assets like real estate or equipment. Amounts in these loans can reach $20 million, with terms from 10 to 25 years. Coupled with their specific purpose, SBA 504 loans are also different from SBA 7(a) loans in the way they work.
Although 7(a) loans are offered by an SBA partner, most often a bank, have in mind three parties contribute to 504 loans: a bank, a Certified Development Company (CDC), and the borrower. Since these three parties tend to work together to offer the loan, you will find that the interest rates are less straightforward than 7(a) loans.
Most often, they range from 4% to around 7%. Howbeit, while the 7(a) is often considered the top SBA loan option for franchise financing owing to its flexibility, the 504/CDC remains a better solution, especially when looking to purchase new equipment or buying, improving, or expanding the real estate for your franchise location.
How to Apply for an SBA Franchise Loan
You will have to apply for an SBA franchise loan almost the same way you do a normal loan application. However, you must be well informed and ready to provide your documentation to both the lender and the Franchise. Here are steps to take to apply for an SBA franchise loan.
Confirm your franchise is eligible for SBA financing
You must go through the SBA franchise directory on the SBA website to note if your franchise is eligible for financing. Note that when SBA franchise lenders review your documents, they will also reference the directory to validate your eligibility. If a brand is not listed in the directory, then consider reaching out to the franchiser if they have plans to be listed. The directory is updated weekly and there are no application fees.
Gather Your Documentation
Note that gathering the necessary documents is another important stage of any loan application. Have it in mind that the more prepared you can be in this initial step, the easy and more convenient the whole process will be. It is recommended you leverage the 7(a) checklist and the 504 Authorization File Library to note the exact paperwork you are expected to provide. The documentation requirements will vary by each lender. Generally, you will 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
Identify Your Local Lender
The SBA does not issue loans directly to franchise owners, and you will be expected to apply through SBA-approved lenders. After you must have organized the documentation, you will need to find a lender or Certified Development Company to submit your application. The SBA’s Lender Match Tool can help connect you with qualified lenders in your area.
Submit and Prepare for Questions
This is without doubt the final step of the loan application itself. After submitting your loan application, have it in mind that some lenders may have additional questions or request additional documentation. Ensure to take your time to review all the necessary details, such as the interest rate and repayment terms, before accepting a loan proposal.
A good number of 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.