3 Small Business Loan Programs to Fund Your Franchise

Franchising is an easy and hassle-free way to get straight into the business world – to finally be your own boss.

Also, franchises are probably the easiest businesses to finance because they don’t typically come with a large initial risk (unknown risk) that banks and other business lenders tend to shy away from. Because most franchises have strong brand names, proven track records of profitability and cash flow, and tend to perform well in almost every location (worldwide), these business models have a tendency to fly through the loan origination process and from application to loan Financing in no time flat.

In fact, in hopes of speeding up its funding process and funding more franchise loans, the Small Business Administration (SBA) created an “SBA Approved Franchise” list — a list of franchises that the SBA has already approved through their underwriting process checked .

According to Jim D, a former moderator of the SBA.gov site;

“SBA-approved franchises are select business opportunities whose agreements have been approved by the SBA. When it comes to securing an SBA-backed loan, it’s easier and faster for those applying for an approved franchise. Applicants for SBA-approved franchises benefit from a streamlined review process that speeds up the loan application process. Because each franchise is pre-approved, the credit check is less complex and focuses on specific aspects of that brand’s business plan.”

So, if the SBA loves franchises so much, what loan programs do they offer?

3 SBA Loan Programs for Franchises

The important things first. The SBA does not make direct loans to business or franchise owners. Therefore, you must still direct your loan request to an SBA-lending bank or financial institution. However, these originators also know that the SBA likes established franchises and are happy to review and process your application.

When looking for an SBA loan for your franchise, you should focus on your specific financing needs and match them with the SBA loan program as follows:

  1. SBA 7(a) Loan Program: This is the SBA’s flagship program, designed to fund almost every aspect of a business.

According to the SBA, the 7(a) loan program can be used:

  • Providing long-term working capital to pay operating expenses, liabilities and/or purchase inventory

  • Short-term working capital needs, including seasonal financing, contract fulfillment, home finance and export

  • Revolving funds based on the value of existing inventories and receivables under special conditions

  • To purchase equipment, machinery, furniture, fixtures, consumables, or materials

  • Acquisition of real estate, including land and buildings

  • To construct a new building or to renovate an existing building

  • To start a new business or to help acquire, operate or grow an existing business

  • To refinance existing business debt under certain conditions

This program has a maximum loan amount of $5 million, with the average in 2012 – the last published figure – being about $337,730.

Because most SBA loans have longer repayment terms, making monthly payments even more affordable, repayment terms can be up to 25 years for real estate, 10 years for equipment, and seven years for working capital.

It is now assumed that all SBA loans are fully collateralized by business or personal assets. Although the SBA expects it to, it will not deny a loan simply because of a lack of adequate collateral.

Finally, you need to know that these loans require the borrower to provide 20% or more as a down payment or their own equity to the business. The SBA therefore only guarantees 80% of the required amount.

As you should see, this SBA program can cover almost any franchise financing need, from real estate purchase and development to office equipment and working capital needs. So if that’s what you need to buy or grow your franchise, start here.

  1. CDC/504 loan program: The 504 loan program, like the 7(a) program, is great for franchises. However, this program is limited to the purchase of real estate and equipment only.

According to the SBA, the 504 loan program can be used for:

  • The purchase of land, including existing buildings

  • Purchase of improvements including grading, road improvements, utilities, parking lots and landscaping

  • The construction of new plants or the modernization, renovation or conversion of existing plants

The real advantage of this loan program, however, is that the equity or down payment required from the borrower is lower – typically around 10% – and therefore less out-of-pocket expenses are required.

How this program works. This program is designed to facilitate additional business growth and development in community areas. Thus, when a 504 loan is applied for and approved, a local Community Development Corporation (CDC) – the municipal portion of the loan – will fund and guarantee up to 40% of the loan application, a local SBA-approved bank will fund 50% of the loan request, where the remaining 10% remain with the borrower. Three partners, all working towards the same goal – the long-term success of your franchise.

This program can provide up to $5 million to companies that can and will create jobs in the community, up to $5 million to companies that provide a stated public benefit such as energy conservation or alternative fuels, and to companies that contribute to the rural development, minority, women or veteran businesses, export businesses – to name but a few – these are stated goals that are known to be non-profit and as such the SBA wants to fund these businesses. And up to $4 million for small, job-creating manufacturing companies.

Eventually, to make these loans and the resulting payments more affordable, following the borrower’s long-term success, the SBA will allow 10-year and 20-year loan terms.

  1. SBA Express Program: The SBA Express Program is like the little brother of the SBA’s 7(a) loan program with several advantages and limitations.

First, this program offers an expedited verification process. In fact, the SBA guarantees that your emergency loan application will receive a response in less than 36 hours. Although you may receive an answer, it does not mean that you will receive approval. It just means you know the SBA has received your application, and they’ll usually ask you for additional information at that point – but at least you know it’s being worked on.

Second, the maximum loan amount under this program is only $350,000. That’s not a huge amount these days, but it could be enough to get you into the franchise of your dreams — especially when compared to the average loan amount for the entire 7(a) program of around $337,730.

Third, the SBA only guarantees up to 50% of the loan amount — meaning much of the credit risk falls back on the bank or lender. However, if your deal is strong enough, that 50% guarantee can just mean the difference between approval and rejection.

After all, these loans only offer terms of up to 7 years and can be used for almost any business capital need.

What is a small business?

To qualify for an SBA loan, your franchise must meet the SBA definition of small business:

  • Be profit oriented.

  • Have up to 500 employees – up to 1,500 for production.

  • Have less than $21 million in annual revenue—less for specific businesses or industries.

Which fit almost all individual franchises.

Conclusion

Franchising is a great way to get into the business world with a proven, well-known business model. However, like almost every business in the world, funding this franchise, either to start or to grow it, is still a difficult hurdle to overcome.

However, as mentioned earlier and hopefully shown, franchises tend to get more favorable approval rates when they take advantage of federally guaranteed financing programs like these SBA loans. And not only does the SBA see these types of companies in an encouraging light, but also banks and other lenders — those other partners that are needed to approve and fund your SBA loan.

Just because your chosen franchise may or may not be on an SBA-approved list, and that your loan application and use of funds meet those criteria, does not mean you are automatically approved. The only way to know for sure if you and your franchise will be approved is to apply. And since you must apply regardless of the option you choose, you might as well apply to a financial organization or business funder that already works with the SBA—they can increase your chances of getting the capital you need to fully realize your franchise , only double dreams.