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Is an SBA Franchise Loan Right for Your Business?
July 10, 2019
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Is an SBA Franchise Loan Right for Your 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 undeserved market, the franchise industry is one that can be incredibly lucrative.

If you’re interested in opening a franchise, the first thing you’ll need to figure out is how you’re going to acquire financing. 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 how to apply for an 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 directories across the country.

What Is the Purpose of SBA Franchise Loans?

The Small Business Administration (SBA) was created in 1953 to help small businesses 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 an additional location, resolving cash flow issues, or even paying for commercial real estate.

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What Are the SBA Loan Requirements?

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, but instead, it provides guaranteed payment security to help reduce the risk of lending to otherwise non lendable businesses. This means that these loans are ideal for businesses with limited or poor credit scores, unproven cash flow projections, or relatively little working capital.

The specific 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 must have reliable numbers. This is because if you’re given a loan, the lender wants to be confident that 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 SBA loan application process. In addition to assuring the ender 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. Also, you’ll need to prove that you’ve exhausted other financing options.

What Are the 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 white list 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

Starting a franchise or growing an existing one can be an expensive endeavor. Therefore, it’s important to realize that there are numerous 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 could be beneficial.

Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2019.

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.