October 20, 2021

SBA Franchise Loans: Are They Right for Your Business?

If you’re interested in opening a franchise, the first thing you’ll need to determine is how you’re going to acquire financing. Typical franchise fees range from $20,000 to $50,000, so starting a franchise certainly isn’t cheap. Furthermore, even if your franchising fees have already been paid and your business is open, your franchise may still need some immediate cash flow solutions. Fortunately, due to lasting partnerships between the federal government and certain financial institutions, you have options. In this blog post, we’ll discuss how to qualify for and use SBA small business loans for franchises. Although these loan products are only designed to serve specific types of businesses, SBA loans are a legitimate financing option that benefit franchise directories across the country.

What Is the Purpose of SBA Franchise Loans?

The Small Business Administration (SBA) was created in 1953 to help small business owners secure the “capital, contracts, and counseling” that they need to become financially viable. Naturally, a significant portion of what the SBA does is provide prospective new businesses with purpose-driven loans. The SBA has partnerships with numerous banks and lenders in all 50 states. As a franchise business owner, you can use an SBA loan to build a financial foundation for your new business. Or you can use it to grow your operations and manage short-term expenses. This may include:
  • Paying franchise fees
  • Opening additional franchise locations
  • Resolving cash flow issues
  • Paying for commercial real estate
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What Are the SBA Loan Requirements?

The SBA loans offers financing to small businesses who can't secure other forms of traditional funding. It's important to note that the SBA doesn’t issue loans directly; it provides guaranteed payment security to help reduce the risk of lending to otherwise risky borrowers. This means that these loans are ideal for businesses with:
  • Poor credit scores
  • Limited Credit history
  • Unproven cash flow projections
  • Low working capital
The application requirements for an SBA loan will depend on the specific institution that's facilitating the loan. Most loans will also have a minimum capital holdings requirement as well as a minimum down payment. Even if your business has no financial history, you must have reliable numbers. This is because if you’re given a term loan or credit line, the lender wants to be confident that you will achieve financial viability. If you’re in the process of starting a new business, then SBA microloans may be your best option. On the other hand, if you’ve already established yourself as a franchise owner, then a SBA 7(a) loan will likely be able to satisfy your needs. These loans are available for up to $5 million and are relatively flexible. Typically, the interest rates range between 7.5 and 10 percent. Other SBA loan options that may be useful for franchisees include SBA 504 Loans and SBA CAPLines. In the SBA loan application process, the following factors are usually considered:
  • Liquidity
  • Working capital levels
  • Operating costs
  • Projected revenues
In addition to assuring the lender that your business is a for-profit company based in the U.S., you’ll also need to prove that you’ve invested some of your own equity. You'll also need to prove that you’ve exhausted other financing options.

What Are the Loan Usage Restrictions?

Because SBA loans are inherently more risky than other small business loans, there’s typically more oversight involved than you might find elsewhere. As stated, SBA loans are often issued under the condition that they’ll be used for a specific purpose (and are thus different from ordinary cash). If you were issued a loan for the specific purpose of starting a franchise, then your funds will need to be used for that. In addition, prior to applying, you should review the SBA’s whitelist of approved franchises. These franchises have worked with the SBA to secure sponsorship and have satisfied a predetermined set of criteria. Fortunately, there are numerous franchises available for you to choose from and the list is expected to continue growing over time.

Conclusion: Weigh Your Franchise Financing Options

Starting a franchise or growing an existing one can be an expensive endeavor. Therefore, it’s important to realize that there are numerous financing solutions available to you. The SBA is willing to sponsor financing for over 100 different franchises, and these loans may be within your ability to secure. Although you should consider all possible options before making any financial commitments, determine if an SBA loan could be beneficial prior to applying. Editor’s Note: This post was updated for accuracy and comprehensiveness in October 2021.