5 Steps For Getting An SBA Loan For Your Franchise

Although opening a franchise may be an alluring business prospect, it can be difficult to secure capital. SBA 7(a) loans and SBA CDC/504 loans are two choices available through the Small Business Administration (SBA). The application, approval, and funding processes can be drawn out by the SBA, which imposes stringent qualifying requirements for both. But the application process is the same.

Knowing the distinctions between these loan types and how to apply can be essential for aspiring franchise owners in order to get the money they require.

Loan Programs for SBA Franchises

Franchise financing can be done through the SBA’s SBA 7(a) and SBA CDC/504 loan programs, which are its two main loan options. The terms and interest rates of these options can vary and they can be utilized for various things.

Loans made under SBA 7(a)

The SBA’s primary loan program, known as 7(a), provides loans up to $5 million for a variety of purposes. Franchisees can use SBA 7(a) loans for working capital, buying inventory, equipment, and other items, advertising, paying payroll, hiring staff, or buying and remodeling a location for your franchise.

Repayment periods range from 10 to 25 years for equipment, working capital, and inventory, depending on how you intend to use the money. For loans of $50,000 or more with maturities of less than seven years, the interest rate ranges from the prime rate plus 2.25% to the prime rate plus 4.75%, whereas loans of $25,000 or less with terms of more than seven years are subject to a higher rate.

CDC/504 Loans from the SBA

SBA-approved Certified Development Companies, or CDCs, are in charge of managing the CDC/504 loans, which are given out to support business expansion and employment. Obtaining fixed assets, such as real estate, machinery, and other equipment required to run a franchise, can be done with loans up to $5 million.

A CDC must contribute 40% of the cash for CDC loans, and the other 50% must come from a private financial institution. Borrowers are required to put down 10% of the loan amount. Real estate has a maximum 20-year repayment period, while machinery and equipment have a maximum 10-year repayment period. Rates are set at a fixed percentage of the loan amount based on the five- and 10-year Treasury rate.

The purposes for which CDC loans may be used are constrained. They cannot, for example, be used for debt consolidation or repayment, inventory purchases, working capital, or any of these.

How to Obtain an SBA Franchise Loan

To obtain an SBA loan for your franchise, follow these procedures.

1. Take into account the qualifications needed

It’s critical to comprehend the eligibility conditions before applying for an SBA loan. You’ll need to satisfy the loan conditions set forth by the SBA as well as any specific SBA-approved lenders.

Following are some examples of the primary qualifications for an SBA franchise loan:

Minimum credit score of 690, although the exact number varies by lender

A three-year period without bankruptcy

• at least 10% as a down payment

• (Prior to the distribution of funds)

• Government debt is nonexistent.

2. Find Out If You’re Eligible

Franchises with SBA financing may not all be eligible. Your franchise needs to be included in the SBA Franchise Directory in order to qualify for financing through the SBA.

Additional eligibility criteria, such as your company’s structure and revenue, may also apply but vary depending on the loan.

3. Assess Lenders

Before choosing a lender, do extensive study into their eligibility and approval chances since they may be influenced by variables other than SBA approval. The SBA Lender Match tool can be used to find lenders who have been approved by the SBA. Select a Certified Development Company that meets your requirements if you wish to submit an SBA 504/CDC loan application.

Take a close look at the eligibility requirements, interest rates, costs, and terms of repayment for each prospective lender. Ask about each lender’s application procedure and funding schedule in accordance with the time frame that you choose. Finding the ideal lender for your business also involves learning about each lender’s reputation and testimonials from prior clients.

4. Compile the necessary paperwork.

Amass the paperwork needed for your application once you’ve chosen a lender. Depending on the type of SBA loan and lender, different documentation will be required. But generally speaking, be ready to offer the following:

Form 1919, an SBA loan application

• An individual financial statement (SBA Form 413)

• An autobiography declaration (SBA Form 912)

• Business financial records, such as cash flow estimates, balance sheets, income statements, and loan application histories

• the last two to three years’ worth of personal and business tax returns

• when appropriate, a description of the collateral

• Copies of your franchise agreement and, if applicable, an Addendum to Franchise Agreement (Form 2462)

• certifications, permits, and leases for businesses

Resumes for each firm owner, a summary of the company’s history, and a business plan

5. Completion and Submission of Your Application

When you’re prepared to submit an application to your preferred lender or CDC, check out the paperwork requirements and follow the instructions. It typically takes five to ten business days to hear back from an SBA loan application. Nevertheless, depending on how complicated your loan application is, the time it takes for SBA loan approval and funds to occur might range from 30 to 90 days. To ensure that your application is processed as quickly as possible, maintain in touch with your lender at all times.

Optional Financing for SBA Franchise Loans

The SBA loan isn’t your only option if you want to invest in a franchise; other forms of financing can have more lenient guidelines, terms, and funding timelines.

Franchiser Financing

In a franchisor financing arrangement, the franchisor serves as the lender and contributes money that you can use to pay for startup and ongoing operating costs. The opportunity to capitalize on the standing and legitimacy of the franchisor’s brand is one of the benefits of this kind of franchise loan.

If you want to start a business but lack experience with business loans or desire to keep your loan in-house, franchisor financing is the ideal option. Although not all franchises provide this type of financing, keep that in mind.

Small-business loans

Online lenders, credit unions, and banks all provide small business loan programs for franchised enterprises. In addition to frequently having simpler applications and quicker funding times than SBA loans, these loans frequently have shorter durations and cheaper interest rates. The most advantageous small company loans offer cheap interest rates as low as 3%, flexible repayment terms up to 10 years, and cash in as short as a few days.

funding for equipment

You can obtain the equipment you need to run your franchise with the aid of equipment finance. Interest rates may be lower than with other types of loans because the loans are secured by the underlying equipment being purchased. Depending on the lender and the equipment, interest rates are typically between 2% and 20%, and repayment lengths might be three to ten years. If you need expensive industrial machinery or specialist technologies, this form of financing may be especially helpful.

Business Loans with a Short Term

Short-term business loans are the best option if you require a quick infusion of capital to take advantage of a franchise opportunity or cover beginning costs like inventory, payroll, or equipment acquisitions. They are designed to be repaid over a brief period. With interest rates ranging from 3% to 50% or more, the normal loan duration for short-term business loans is between one and three years, however this might vary. You will pay less interest overall on these loans because of their quicker repayment terms.

Credit for businesses

A company line of credit sets an agreed-upon credit amount that may be accessed whenever necessary and on a revolving basis throughout the draw period—typically between $2,000 and $250,000 for one to five years.

For working capital, renovations, or inventory purchases, lines of credit are frequently employed in franchise finance. The typical range of interest rates is 10% to 99%. If you’re a seasoned franchise owner with a successful company and a good credit history, business lines of credit are best for you.