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Is an SBA Loan Right for Your Franchise Business?
October 30, 2018
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Is an SBA Loan Right for Your Franchise Business?

Currently, there are an estimated 750,000 franchise establishments operating in the United States, and this number is only expected to grow. With a proper understanding of business operations and the ability to invest in an underserved market, the franchise industry is one that can be incredibly lucrative.

If you’re currently considering opening a franchise, the first thing you’ll need to figure out is how you’re going to finance your operation. After all, with typical franchise fees ranging from $20,000 to $50,000, 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 lenders, you have options.

In this post, we’ll discuss the possibility of using various SBA Loan Programs to grow your franchise. Although these types of loans are only designed to serve specific types of businesses, it’s a legitimate financing option that has helped franchise owners across the country.

What Are the Purpose of SBA Loans for Franchises?

The Small Business Administration (SBA) was originally created in 1953 to help small businesses secure the “capital, contracts, and counseling” that they need to become economically viable. Naturally, a significant portion of what the SBA does is help 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 use it to grow your operations and manage short-term expenses. This may include paying franchise fees, opening an additional location, resolving cash flow issues, or even paying for commercial real estate.

SBA Loan Requirements and Application Process

SBA loans are specifically designed for small businesses who’ve been unable to secure other forms of financing. The SBA doesn’t issue loans directly to its applicants, but instead, it provides guaranteed payment security to help reduce the risk of lending to otherwise un-lendable businesses. This means that these loans are ideal for businesses with limited or poor credit history, unproven cash flow projections, or relatively little working capital.

The specific eligibility and application requirements for an SBA loan will depend on the specific institution that is 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’ll still need to have reliable (and reasonable) numbers suggesting that if you were to be given a loan, you could achieve a state of 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 Programs that may be useful for franchisees include SBA 504 Loans and SBA CAPLines.

Variables such as liquidity, working capital levels, operating costs, and projected revenues will all be considered during the application process. You will not only need to assure the lender that your business is a for-profit business operating in the U.S., but you’ll also need to prove that you’ve invested some of your own equity and have exhausted other financing options.

Usage Restrictions

Because SBA loans are inherently more risky than other business loans, there is 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 what you promised.

In addition, prior to applying, you should review the SBA’s white list of approved franchises. These franchises have worked with the SBA in order 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

Starting a franchise or growing an existing one can be an expensive endeavor, but it’s important to realize that there at least a few reasonable financing options. 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, make sure you determine if an SBA loan can benefit your franchise.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Andrew Paniello
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Andrew is an experienced writer with a degree in Finance from the University of Colorado. His primary interests are investing, entrepreneurship, and economics.
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