Ultimate Guide to SBA Loans for Franchisees

Did you know that approximately 2.9% of businesses are franchises? A franchise is a business model that allows individuals to sell products or services owned by a franchisor.

Franchisees get access to all the business’s proprietary information, including the business name, branding, and resources. The franchisor gets a royalty for allowing the franchisee to use their business model.

Are you thinking of becoming a franchisee? If so, the first step is to have enough money to open the franchise. Keep reading to learn how to get an SBA loan for a franchise.

What Are SBA Franchise Loans?

Because opening a franchise can be expensive, some small business owners need financial assistance. SBA franchise loans are loans designated for business owners planning to open a franchise.

Franchise loans can be used to pay for the initial franchise startup costs. This can include buying land, constructing a building, buying equipment, and paying employees. These loans can also allow you to buy an existing franchise or expand a current franchise.

Here are some of the most common types of SBA franchise loans:

SBA 7(a) Loans

If you are looking for general financing to start a franchise, an SBA 7(a) loan could be the best option for you. These loans can be used to buy land, expand a franchise, resolve debts, or use as working capital.

You can take out an SBA 7(a) loan of up to $5 million. The loan terms will depend on several different variables, including the type of franchise, business needs, and potential earnings.

In general, you can expect to have either a fixed or variable interest rate. Your loan terms may expand up to 25 years.

SBA 7(a) Loan Requirements

Of the two most common types of SBA franchise loans, the SBA 7(a) loan has less strict requirements. To qualify, you have to show the need for a loan, not be behind on any current debt, and use other available financial resources before applying for a loan.

SBA 504/CDC Loans

SBA 504/CDC loans are best if you want to purchase major business assets. They allow you to buy an existing franchise, remodel a building, or buy expensive machinery.

SBA 504/CDC loans are more complicated than SBA 7(a) loans. They consist of three separate parts:

  • Lendor or bank investment (50%)
  • Development company certified by the SBA (40%)
  • Down payment (10%)

The largest part of an SBA 504/CDC loan is funded by a bank or other lender. The interest rate from this lender should be less than 9.25%. This interest rate can be either fixed or variable, depending on the lender.

The next biggest part of the SBA 504 loan is the part invested by a development company. These companies, certified by the SBA, are nonprofits that help the community by funding businesses and creating jobs.

Lastly, as the borrower, you have to pay 10% of the SBA 504/CDC loan as a down payment.

SBA 504/CDC Loan Requirements

One of the main requirements to qualify for an SBA 504/CDC loan is that you create at least one new job. If you can’t meet that requirement, you won’t qualify. For existing franchise owners, it also counts if you save one job by taking out the loan.

In addition to creating a new job, an SBA 504 loan seeker also must have a tangible net worth less than $15 million and an average net income of less than $5 million.

Franchise Loan Requirements

If you want to apply for an SBA franchise loan, you must first know the requirements to qualify. It also helps to understand why SBA loans get denied.

To qualify for an SBA loan, you need to meet these requirements:

  • Be a United States business
  • Be a for-profit business
  • Be in an industry approved by the SBA

Non-profit business, one involving gambling, or a life insurance company will not qualify for an SBA franchise loan. In addition to meeting these general requirements, there are other standards for qualifying as well.

The SBA looks at the relationship between the franchisor and the franchisee. If the franchisor holds too much control, the loan may not be approved. Be sure to choose your franchisor with this factor in mind.

The SBA lender will also determine eligibility based on you as a lender. Do you have experience running a business? Are you reliable?

The SBA will want to know your credit history, your experience level, the value of your collateral, and your income.

How to Apply For an SBA Loan

Now that you know the different types of SBA franchise loans and the requirements, how do you apply for one of these loans?

The first step is to determine if you and your franchise are eligible to receive an SBA loan. One of the best ways to determine if you are eligible is to refer to the SBA franchise directory.

Once you have determined your eligibility, the next step is to choose if you want to apply for an SBA 7(a) loan or an SBA 504/CDC loan. This will depend on your business needs and how you plan to use the money.

After determining what type of loan is best for your business, you will need to gather all the required documents. This will include financial statements, a business license, a resume, and more.

Once you have gathered everything that you need, you can submit your application. On average, it takes two or three months to hear about the status of your application. If you want to speed up the process, consider working with a preferred lender.

Start Your Franchise With an SBA Loan

Are you ready to start your own franchise? The first step to starting your next business is obtaining the money. With an SBA loan, you don’t have to wait until you save up all the money on your own.

Are you ready to find your SBA franchise loan? If so, use our SBA lenders tool to find the best SBA banks for you!