SBA Loan for Franchise: A Guide for Financing Your New Business
Going into business for yourself by buying a franchise is an exciting venture, but it can also be an expensive one. As a new entrepreneur, you may not have the necessary funds on hand to get your business up and running.
But as a franchise owner, you are a small business owner, which makes you eligible for help from the U.S. government’s Small Business Association. Created in the wake of World War II, the SBA’s primary purpose was to aid, counsel, assist, and protect small businesses, which are crucial for the creation of jobs, and the health of the economy. Then, as now, one of the primary purposes of the SBA is providing financial assistance to small businesses by facilitating loans.
In this guide, we’ll explore how these loans work and how they can help you finance your new franchise.
How to Apply for an SBA Loan for Franchise Financing
Begin by identifying the franchise you want to buy. Some franchises cost less than $50,000 to start, while others require upwards of $1 million. Knowing how much the initial investment is will give you some idea of how much you’ll need to borrow. You’ll also want to factor in any personal funds you plan on contributing. Once you’ve signed the franchise agreement and paid the franchise fee, it’s time to start looking for a loan.
One of the benefits of an SBA loan is that it’s backed by a government guarantee. That means that if you default on the loan, the lender can recover a portion of the outstanding balance. Since this reduces the lender’s risk, the lender may be more inclined to approve applications from borrowers who may not otherwise qualify.
Another benefit of an SBA loan for franchisees is that lenders may also be more open to longer repayment terms. The lower monthly payment amount lessens the strain on cash flow, making it easier for borrowers to repay their loans.
In order to apply for an SBA loan for franchise financing, you’ll need to confirm that the franchise you’ve chosen meets the SBA loan franchise requirements. While the SBA does not outrightly approve or disapprove individual franchises, the franchisor must meet the SBA's criteria for the franchise to be included in their approved franchises list. The criteria include a proven business model, at least two years of operating experience, and a good financial track record. Moreover, the franchisor must demonstrate its ability to support its franchisees through training programs and other support systems.
You can check to see if the franchise is on the SBA franchise directory, but the list is only current through May 2023, so newer franchises, while eligible, may not be on the list.
Once you’ve determined that your franchise is eligible, you’ll need to find an SBA approved lender. You can use the SBA’s Lender Match Tool to start the search.
It’s important to be aware that the SBA doesn’t lend directly to you — instead, loans are facilitated by SBA-approved lenders, such as traditional banks and microlending institutions. Depending on whether an institution is an SBA preferred lender, SBA loan applications may be subject to two approvals — first from the lending institution, then from the SBA.
The next step in finding an SBA loan for franchise financing is to figure out what type of loan you need. What people usually refer to as an SBA loan is officially called a 7(a) loan. You can borrow between $500,000 and $5 million and the money can be used to purchase real estate, equipment, fixtures, furniture, and supplies, as well as for the working capital you’ll need while you get your business up and running. If you need to borrow $500,000 or less, you can take out a 7(a) small loan. Collateral is not required for loans of $50,000 or less.
The terms of repayment of your SBA loan, as well as the interest rate (which can be variable or fixed), will vary, depending on the loan you secure. But the interest rate you can be charged is capped by the SBA.
After you’ve submitted your application, along with any required paperwork, some lenders may have additional questions or request additional documentation. Be sure to review all the essential details, such as the interest rate and repayment terms, before accepting a loan proposal. Some SBA lenders may require a 20% to 30% down payment, depending on whether you’re purchasing an existing franchise unit or opening a new location.
Generally, securing an SBA loan can take two to three months. It’s possible to shorten the timeline by working with an SBA preferred lender — these lenders have the authority to make final decisions on loan applications instead of waiting for approval by the SBA.
What to Do If Your Loan Application is Denied
Keep in mind that just because you’re eligible for an SBA loan doesn’t mean you’ll get one. The SBA 7a and 504 Summary Report shows just how many of these loans are approved each year.
As with any other type of loan, lenders can deny your application for many reasons, including lack of proof that your business will have the necessary cash flow to make loan payments, a previous default on a government loan, or a low credit score.
If you are denied, find out the reason why, and see if you can correct it. The SBA allows you to reapply for the loan 90 days after the denial.
In the meantime, discuss options with your franchisor. These may include in-house financing or using your retirement funds to finance the purchase.
How Concrete Craft Helps with Financing
At Concrete Craft, the nation’s largest decorative concrete franchise, we know that the financial piece is a determining factor for many prospective franchisees, and we do what we can to help. To begin with, we make it very clear what your franchise investment will be. With initial fees of $69,960 and another $86,380 required in working capital, your startup costs range from $156,330-$233,450. We offer $40,000 in-house financing, bringing the amount of cash required down to $116,330.
We will also explain how you can pay for your franchise using funds from your 401(k) with no penalty or taxes.
Get Started with Concrete Craft Today
If you’d like to find out more about SBA loan franchise requirements, contact us today. Concrete Craft is on the SBA franchise list, and we can help you see if you will qualify for an SBA loan, getting you started on the path to franchise ownership.