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The idea of owning a franchise attracts a lot of new small business owners. There are inherent benefits that they can take advantage of. The brand value is already there, customers know about the products and the demand exists. Buying a franchise business can thus enable new entrepreneurs to hit the ground running. According to the US Census Bureau, 10.5% of all businesses in the country are franchises and they account for almost 3% of the national GDP. The entire sector comprises over 780,000 businesses.
Even though there’s a great opportunity for growth in this industry, the barrier to entry remains quite high which is one of the reasons why new business owners can struggle to obtain small business franchise loans. Banks are typically wary about lending to those who have no prior experience running franchise businesses successfully. The SBA franchise loans are a crucial lifeline for all those business owners who are unable to obtain conventional small business franchise loans.
Benefits of owning a small business franchise
Buying a franchise is an attractive idea for new business owners since they receive business assistance from the franchisor. This could be anything from an entirely turnkey operation complete with equipment and supplies to in-depth guidance on successfully running the business.
Furthermore, the brand is already well recognized and customers rely on the products. This lowers the failure rate for business owners as they essentially become part of a successful brand that pulls in a steady stream of customers.
SBA Franchise Loans
Both new and existing business owners can take advantage of the SBA franchise loans. The Small Business Administration has partnerships with lenders in all 50 states, thereby providing borrowers with a lot of options to choose from once they’ve decided to obtain a franchise bank loan.
This is the preferred option for most business owners as the franchise loan interest rates offered on the SBA programs tend to be considerably lower than those for conventional bank loans. This makes it possible for business owners to get the financing they need at low-interest rates with long repayment terms, thus providing them with a lot of leeway to get their business off the ground.
Given that franchise fee for most businesses can cost upwards of $50,000, the SBA 7(a) and 504 loans are the best SBA franchise loan options.
SBA 7(a) loan for franchises
The SBA 7(a) loan is essentially the most suitable option for a franchise. Business owners can obtain up to $5 million in funding that needs to be repaid in 10 – 25 years. The interest rates tend to be lower than regular franchise loan interest rates, usually in the 4.5 – 5.5% range but it may vary depending on the lender, the amount required, and other conditions.
You can use the SBA 7(a) loan to cover initial franchise fees, acquisition of equipment, furniture and fixtures, inventory, working capital and other startup costs. The funds can also be used to acquire land upon which to construct the franchise or to acquire existing franchises.
Almost all of the business expenses that you might have can be covered with the SBA 7(a) loan. There is one important exception to keep in mind. Any ongoing franchise or royalty fees can’t be paid through the SBA 7(a) funds.
The list below includes the rest of our best SBA approved lenders for small business franchise loans:
Top SBA Franchise Lenders
When it comes to securing an SBA loan for your franchise business, finding the right lender is crucial. We created SBALenders.com to fill this very important role of matching the right borrowers with the right lenders to streamline the financing process through our Find me a Lender tool. Not all lenders have the same expertise or experience in franchise financing, and some prefer certain industries/franchises over others. Here are some key factors to consider when searching for the right SBA lender for franchise loans.
- Franchise Experience: Look for lenders with experience in financing franchise businesses. These lenders understand the specific requirements and intricacies of franchise financing, making them well-equipped to guide you through the loan process. They can provide valuable insights, offer tailored solutions, and help you navigate the complexities of franchise-related regulations and documentation.
- SBA Preferred Lenders: Consider working with lenders designated as Preferred Lenders by the Small Business Administration. Preferred Lenders have a proven track record of success in originating and servicing SBA loans. They have a streamlined loan approval process, enabling faster loan processing and a higher likelihood of loan approval.
- Franchise Network Partnerships: Some lenders establish partnerships or relationships with specific franchise networks. These partnerships can simplify the loan application process by providing access to pre-approved franchises or franchise-specific loan programs. Research lenders that have established relationships with the franchise brands you are interested in to increase your chances of loan approval. Typically, the franchisor will have a list of a few “pocket” lenders for prospective to call. Alternatively, if you contact us, we will tell you exactly which lenders provided SBA loans for your desired franchise over the past few years.
Here are the top franchise lenders based on actual closed loans:
| Rank | Bank | Bank Name / Franchise Name | # of Loans | Avg Loan | Avg Rate | Avg Term |
|---|---|---|---|---|---|---|
| 1 | Stearns Bank | Stearns Bank | 466 | $248,002 | 6.8% | 122 |
| Supercuts | 19 | $120,068 | 6.8% | 109 | ||
| Fedex Ground | 11 | $469,100 | 6.9% | 121 | ||
| Club Pilates | 11 | $148,891 | 6.7% | 123 | ||
| ILOVEKICKBOXING.COM | 11 | $198,609 | 6.9% | 123 | ||
| 2 | Wells Fargo | Wells Fargo | 336 | $543,711 | 6.2% | 137 |
| Anytime Fitness | 32 | $479,025 | 6.4% | 117 | ||
| Jimmy John'S | 15 | $549,820 | 6.2% | 150 | ||
| Orange Theory Fitness | 13 | $608,608 | 6.2% | 134 | ||
| The Goddard School | 10 | $1,484,420 | 5.3% | 206 | ||
| 3 | The Huntington National Bank | Huntington National | 244 | $346,845 | 6.4% | 114 |
| Subway | 7 | $82,857 | 6.0% | 81 | ||
| Anytime Fitness | 6 | $209,617 | 6.3% | 92 | ||
| X-Golf | 6 | $283,183 | 7.0% | 102 | ||
| Ace Hardware | 5 | $904,000 | 6.3% | 138 | ||
| 4 | Celtic Bank | Celtic Bank | 223 | $360,454 | 6.6% | 137 |
| Experimac | 14 | $150,000 | 6.6% | 120 | ||
| Mr. Appliance | 6 | $195,900 | 6.8% | 120 | ||
| Patrice & Associates | 6 | $129,167 | 6.6% | 120 | ||
| Tutor Doctor | 5 | $140,000 | 6.6% | 120 | ||
| 5 | Spirit of Texas Bank | Spirit of Texas Bank | 197 | $346,613 | 6.4% | 125 |
| European Wax Center | 32 | $380,631 | 6.4% | 119 | ||
| Sport Clips | 31 | $223,226 | 6.4% | 119 | ||
| Club Pilates | 20 | $236,770 | 6.5% | 120 | ||
| Amazing Lash Studio | 13 | $370,738 | 6.4% | 120 | ||
| 6 | JPMorgan Chase Bank | JPMorgan Chase Bank | 141 | $342,466 | 6.3% | 105 |
| Jimmy John's | 5 | $417,340 | 4.7% | 115 | ||
| Orange Theory Fitness | 4 | $337,500 | 5.5% | 123 | ||
| Fedex Ground | 4 | $568,575 | 5.8% | 112 | ||
| 7 | United Midwest Savings Bank | United Midwest Savings Bank | 138 | $260,851 | 6.9% | 129 |
| Signarama | 9 | $150,000 | 6.9% | 120 | ||
| Five Star Painting | 7 | $123,333 | 7.0% | 120 | ||
| Tutor Doctor | 4 | $145,000 | 7.0% | 120 | ||
| 8 | U.S. Bank | U.S. Bank | 86 | $396,817 | 6.7% | 125 |
| Anytime Fitness | 5 | $269,800 | 6.6% | 120 | ||
| The Ups Store | 4 | $144,475 | 6.4% | 120 | ||
| MASSAGE ENVY | 4 | $313,725 | 6.3% | 120 | ||
| 9 | TD Bank | TD Bank | 81 | $414,024 | 8.0% | 106 |
| The Ups Store | 5 | $90,200 | 5.2% | 113 | ||
| Subway | 4 | $255,000 | 7.4% | 123 | ||
| 10 | Radius Bank | Radius Bank | 79 | $679,908 | 6.7% | 132 |
| Orange Theory Fitness | 19 | $787,774 | 6.6% | 124 | ||
| Massage Envy | 6 | $1,069,383 | 6.5% | 117 | ||
| 11 | M&T | M&T | 69 | $275,034 | 6.9% | 94 |
| Ilovekickboxing.Com | 3 | $138,333 | 6.5% | 94 | ||
| Kiddie Academy | 3 | $496,550 | 6.4% | 90 | ||
| 12 | Byline Bank | Byline Bank | 64 | $932,029 | 6.7% | 162 |
| Dickey'S Barbecue Pit | 11 | $428,054 | 6.7% | 123 | ||
| 13 | Newtek Small Business Finance | Newtek Small Business | 57 | $619,923 | 6.8% | 150 |
| True Value Hardware | 4 | $500,000 | 6.6% | 252 | ||
| 14 | United Community Bank | United Community Bank | 56 | $747,255 | 6.5% | 147 |
| Ilovekickboxing.Com | 5 | $287,800 | 6.7% | 125 | ||
| 15 | KeyBank | KeyBank | 53 | $649,745 | 6.4% | 140 |
| Subway | 4 | $128,750 | 6.8% | 94 | ||
| 16 | Live Oak | Live Oak | 48 | $2,100,943 | 6.2% | 206 |
| Ameriprise Financial | 23 | $474,091 | 6.6% | 120 | ||
| 17 | Compass Bank | Compass Bank | 45 | $978,345 | 6.0% | 150 |
| The Goddard School | 6 | $3,165,833 | 5.0% | 310 | ||
| 18 | BankUnited | BankUnited | 43 | $1,640,441 | 6.2% | 231 |
| Best Western Inn | 5 | $2,351,800 | 6.0% | 300 | ||
| 19 | NOA Bank | NOA Bank | 41 | $1,301,517 | 5.9% | 259 |
| QUALITY INN/QUALITY SUITES, HO | 5 | $1,440,000 | 6.0% | 300 | ||
| 20 | Bank of George | Bank of George | 41 | $2,015,160 | 6.1% | 300 |
| Quality Inn/Quality Suites, Ho | 10 | $2,122,700 | 5.4% | 300 | ||
| Super 8 | 8 | $1,412,000 | 5.9% | 300 | ||
| 21 | SunTrust Bank | SunTrust Bank | 39 | $794,115 | 6.2% | 137 |
| Allegra Network | 3 | $427,000 | 6.1% | 108 | ||
| 22 | First Home Bank | First Home Bank | 39 | $236,061 | 6.8% | 120 |
| Party Princess Productions | 2 | $904,000 | 6.8% | 120 | ||
| 23 | PNC Bank | PNC Bank | 38 | $194,325 | 6.7% | 91 |
| CycleBar | 4 | $400,250 | 6.8% | 96 | ||
| 24 | Citizens Bank | Citizens Bank | 36 | $959,238 | 6.4% | 171 |
| Marco'S Pizza | 5 | $326,550 | 6.6% | 124 | ||
| 25 | The Bancorp Bank | The Bancorp Bank | 36 | $635,116 | 6.5% | 145 |
| Fantastic Sams | 15 | $210,307 | 6.6% | 136 |
SBA Loan Requirements for Purchasing a Franchise
Purchasing a franchise can be an exciting opportunity, and Small Business Administration (SBA) loans offer a valuable financing option for franchisees. However, it is important to understand the specific requirements set by the SBA and participating lenders when seeking an SBA loan for purchasing a franchise. Let’s explore the key requirements for obtaining an SBA loan for franchise acquisition.
Eligible Franchise
In the past, the franchise you intended to purchase must be on the SBA’s approved franchise list. The SBA maintains a directory of pre-approved franchises that have met certain criteria, streamlining the loan application process. However, in 2023 the SBA scrapped the approved franchise list and instead put the burden on the SBA lender to determine that the franchise was legitimate and did not violate the SBA’s affiliate rules and definition of a small business with 500 or less employees. Suffice to summarize that most franchises in America would be considered eligible.
Personal Credit History
Lenders evaluate the personal credit history of franchisees to assess their creditworthiness. While specific credit score requirements may vary among lenders, a good personal credit score enhances the chances of loan approval. Most SBA lenders will want to see a credit score greater than 650 for an acquisition of a franchise and perhaps slightly higher for a loan to start a new franchise location as new builds are riskier than existing, operating franchisee locations.
Down Payment
SBA loans require a down payment or equity injection from the borrower. Typically, franchisees are required to contribute a percentage of the project cost from their own funds. The specific down payment requirement may vary depending on a variety of factors, including but not limited to the borrower’s industry experience, the perceived value of the franchise, the historical performance of the target or cohort of franchise locations, and the use of funds. We typically see 10% – 25% being injected by the borrower.
Collateral
Perhaps the biggest benefit of SBA franchise loans is the loan does not have to be fully collateralized by hard assets, which is generally required with traditional commercial and industry (C&I) loans. Note that the SBA lender will still ask the borrower to pledge all available collateral, but the loan does not have to be 100% collateralized by assets. Collateral can include personal assets such as real estate, equipment, or other valuable assets. Prepare to provide details regarding business and personal collateral as part of the loan application process.
Business Plan and Franchise Disclosure Document (FDD)
A business plan outlining the franchise concept, market analysis, marketing strategy, financial projections, and operational details. It should demonstrate your understanding of the franchise industry and present a strong case for the success of your franchise business. Many borrowers lean heavily on the Franchise Disclosure Document (FDD) when creating a business plan.
The FDD is a legal document that franchisors in the United States are required to provide to potential franchisees before the sale of a franchise. The purpose of the FDD is to provide comprehensive information about the franchisor and the franchise opportunity, allowing prospective franchisees to make an informed decision.
The FDD typically contains detailed information about the franchisor’s background, business experience, litigation history, and financial statements. It also includes details about the franchise system, such as the franchise fees, initial investment costs, ongoing fees, territory rights, training and support, trademarks, and contractual obligations. Additionally, the FDD may include information about current and former franchisees, as well as any restrictions or conditions associated with the franchise agreement.
Franchisees are legally required to receive the FDD at least 14 days before signing any agreement or paying any fees to the franchisor. This timeframe allows potential franchisees to review the document, seek legal and business advice, and conduct due diligence to assess the viability and suitability of the franchise opportunity.
The FDD is an important tool for franchisees to understand the terms and conditions of the franchise they are considering. It provides transparency and disclosure of crucial information to help potential franchisees make an educated decision about investing in the franchise system. Franchisees are advised to thoroughly review and understand the contents of the FDD, seek professional advice, and ask any questions they may have before entering into a franchise agreement.
We encourage anyone looking to purchase a franchise to review the FDD with competent counsel and financial advisors. In addition, potential franchisees should ask for permission to speak with a handful of existing franchisees to obtain their perspective on the opportunities and challenges as a franchisee. Some franchisors will cherry pick the best franchisees to speak with potential franchisees, so we also advise asking for contact information for a few franchisees you select independently.
Personal Guarantees
Personal guarantees are typically required for SBA loans. This means that as a franchisee, any owner of 20% or more will be personally responsible for loan repayment in case the business is unable to fulfill its obligations. Lenders often require personal guarantees to mitigate their risk.
Franchise Industry Experience
While not a strict requirement, having prior experience in the franchise industry can strengthen your loan application. Lenders may consider industry experience as an indicator of your ability to successfully operate the franchise business. Demonstrating relevant experience and expertise can increase your credibility as a borrower. If a borrower does not have direct industry experience, transferable or relatable business skills and experience may suffice. For example, an operator of a sandwich shop may deem to have transferable skills sufficient to run a yogurt cafe. Industry experience is more important in regulated or labor-intensive businesses (e.g., a nursing home) and less important for labor-light businesses (e.g., a car wash).
Financial Documentation
Lenders evaluate the financial stability of franchisees by reviewing personal and business financial statements, tax returns, and other relevant financial documents. It is essential to maintain accurate and up-to-date financial records to present a strong financial profile to lenders.
Franchise Agreement
Lenders will require a copy of the franchise agreement as part of the loan application process. The agreement outlines the terms and conditions of the franchise purchase, including franchise fees, royalty payments, and other contractual obligations. It is important to review the franchise agreement carefully and ensure it aligns with your financial capabilities.
SBA Loan Application
To apply for an SBA loan, you will need to complete the necessary loan application forms provided by your chosen lender. We discuss what a typical SBA loan application looks like in the Documents Needed section.