3 Small Business Administration Loan Programs To Finance Your Franchise

MLM is a simple and easy way to jump right into the world of business – finally becoming your own boss.

In addition, franchises are probably the easiest businesses to fund because they usually don’t come with a lot of startup risk (unknown risks) that banks and other commercial lenders tend to shy away from. Since most franchises come with strong brand names, proven profitability and cash flow records and tend to do well just about anywhere (globally), these business models have a tendency to travel through the loan underwriting process and go from application to financing anywhere. The time is fixed.

In fact, the Small Business Administration (SBA), hoping to speed up the financing process and fund more franchise loans, has created an “SBA Certified Franchise” list—a list of franchise franchises that the SBA has already vetted through its underwriting process.

According to Jim Dee, former moderator of the SBA.gov website;

“SBA-accredited franchises are select business opportunities whose agreements have been accepted by the SBA. When it comes to securing an SBA-backed loan, it’s easier and faster for accredited franchise applicants. SBA-certified franchise applicants benefit. A streamlined review process speeds up the application The loan. Because the particular franchise is pre-approved, the loan review is less complex and focuses on specific aspects of that brand’s business plan.”

So, if the Small Business Administration loves franchises so much, what loan programs do they offer?

3 SBA Loan Programs For Franchising

The most important things first. The SBA does not make direct loans to business owners or franchisees. Thus, you will still have to take your loan application to an SBA lending bank or financial institution. However, these assets also know that the SBA loves their proven franchise business and is very eager to review and process your application.

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

  1. SBA 7(a) Loan ProgramThis is the SBA’s flagship program designed to fund virtually all aspects of business.

According to the Standby Credit Agreement, the 7(a) loan program can be used:

  • To provide long-term working capital to be used to pay operating expenses, accounts payable and/or to purchase inventory

  • Short-term working capital needs, including seasonal financing, contract performance, construction and export financing

  • Revolving funds based on current inventory value and receivables, under special circumstances

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

  • To purchase real estate, including land and buildings

  • To construct a new building or renovate an existing building

  • To create a new business or assist in the acquisition, operation, or expansion of an existing business

  • To refinance existing business debt, under certain conditions

The maximum loan amount for this program is $5 million with an average, in 2012 – last published figure, of approximately $337,730.

Since most SBA loans come with longer loan terms making monthly payments more affordable, real estate loan maturities can be up to 25 years, up to ten years for equipment and up to seven years for working capital.

Now, all SBA loans are supposed to be fully secured by business or personal assets. However, while the SBA expects this, it will not refuse a loan based solely on insufficient collateral.

Finally, know that these loans require that the borrower put up 20% or more as a down payment or their own equity in the transaction. Thus, the SBA will only guarantee 80% of the requested amount.

As you should be able to see, this SBA program can cover almost all of your franchise financing needs from real estate purchase and development to business equipment to working capital needs. Thus, if this is what you need to buy or grow your franchise, start here.

  1. CDC/504 Loan ProgramA 504 loan program, like a 7(a) program, is great for franchisees. 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;

  • Land purchase including existing buildings

  • Purchase improvements, including grades, street improvements, utilities, parking, and landscaping

  • Building new facilities or modernizing, renovating or converting existing facilities

But the real benefit of this loan program is that the portion of principal or down payment required from the borrower is lower – usually around 10% – and, therefore, requires less out-of-pocket expenses.

How does this program work. This program is designed to help facilitate additional business growth and development within areas of the community. Thus, upon request and approval of a 504 loan, the Community Development Corporation (CDC) – the community portion of the loan – will finance and guarantee up to 40% of the loan application, and a local SBA approved bank will finance 50% of the loan application leaving the remaining 10% from the borrower. Three partners all working toward 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 society, and up to $5 million to companies that provide a declared public benefit such as energy reduction or alternative fuels as well as works for rural development, minorities, women, or veterans Companies and export companies – to name a few – these are stated goals that are known to be of public interest and as such the Small Business Administration wants to fund these companies. and up to $4 million for small manufacturing companies that create jobs.

Finally, to make these loans and their resulting payments more affordable—leading to long-term success for the borrower—a standby credit agreement would allow for loan terms of between 10 and 20 years.

  1. SBA Express ProgramThe SBA express program is like the younger sibling of the SBA 7(a) loan program with many benefits and limitations.

First, this program offers a quick review process. In fact, the SBA guarantees that your express loan application will receive a response in less than 36 hours. But, while you may receive a response, it does not mean that you will receive an approval. It just means that you’ll know your application has been received by the Small Business Administration and they’ll usually ask for additional information from you at that time — but at least you know it’s in the works.

Secondly, the maximum loan amount under this program is only $350,000. Which isn’t a huge amount these days but it could be enough to get you the franchise of your dreams — especially when you compare it to the average loan amount for a full 7(a) program of about $337,730.

Third, the SBA will only guarantee up to 50% of the loan amount – which means that more of the loan risk will fall on the bank or lender. However, if your deal is strong enough, that 50% guarantee could be the difference between approval and rejection.

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

What is a small project?

Now, to qualify for an SBA loan, your franchise must meet the SBA’s small business definition of:

  • Be for-profit.

  • It has up to 500 employees – up to 1,500 for manufacturing.

  • You have less than $21 million in annual receipts — less for some businesses or industries.

that fit almost all individual franchise companies.


Franchising is a great way to get into the business world with a well-known and recognizable business model. However, like almost all businesses on the planet, financing a franchise to either start it up or grow it is still a difficult hurdle to overcome.

However, as stated and hopefully shown, franchises tend to have more favorable approval rates when using government guaranteed funding programs such as these. SBA loans. And not only does the Small Business Administration view these types of businesses in an encouraging light, but it also looks at banks and other commercial lenders—those other partners who need to get, approve, and finance your SBA loan.

However, just because your chosen franchise is or is not on the SBA-approved list and your loan application and use of funds meet those criteria, does not mean that you will be automatically approved. The only way to know if you and your franchise will be approved is to apply. And since you have to apply no matter which option you choose, you can also apply with a financial institution or business financier already working with the SBA—that can only double your chances of getting the capital you need to fully realize your franchise dreams.

Source by Joseph H. Lizio

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