If you’re looking into franchise ownership, it’s likely that one of the top questions you have pertains to financing. After all, you can’t own a business if you don’t have the necessary funds to start it. While there are various financing options available, a common way to obtain a loan is through the U.S. Small Business Administration (SBA).
Funding a franchise is no small feat and typically requires some level of financing. Amanda Berry, a franchise consultant for FranNet, offers helpful information regarding this process.
If you’ve started the process of researching which franchise might be the best fit, you’ve probably seen that some use the term “SBA-approved”. Understanding what this means is key to evaluating your financing options for buying a franchise.
What Is an SBA Loan?
Technically, the U.S. Small Business Administration does not directly extend loans for financing a small business, rather it provides the backing that a small business needs to acquire the loan from a private lender. There are a couple types of SBA loans available for those who are planning to buy a franchise.
General Small Business 7(a) Loan
Franchisees most commonly use the 7(a) loan, which will not exceed the maximum amount of $5 million. The SBA’s website states that these loans can be used for:
- Long- and short-term working capital
- Revolving funds based on the value of existing inventory and receivables
- The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
- The purchase of real estate, including land and buildings
- The construction of a new building or renovation of an existing building
- Establishing a new business or assisting in the acquisition, operation, or expansion of an existing business
- Refinancing existing business debt, under certain conditions
There is an extensive checklist for those applying for a 7(a) loan so you should seek guidance from an experienced CPA or another franchisee that has gone through the process already.
Visit 7(a) loans on the SBA’s website for more information.
504/CDC Loan Program
Franchisees can also apply for a 504/CDC loan, which “provides long-term, fixed-rate financing for major fixed assets that promote business growth and job creation.” For most 504 loans, the maximum amount offered is $5 million, but for certain energy projects “the borrower can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total.”
Since the purpose of a 504 loan is to promote business growth and job creation, the SBA outlines the specific requirements for how a business owner can use the loan.
These include the purchase or construction of:
- Existing buildings or land
- New facilities
- Long-term machinery and equipment
Or the improvement or modernization of:
- Land, streets, utilities, parking lots, and landscaping
- Existing facilities
A 504 loan cannot be used for:
- Working capital or inventory
- Consolidating, repaying or refinancing debt
- Speculation or investment in rental real estate
It’s important to note that a 504 loan is only available through a Certified Development Company (CDC).
Visit 504 loans on the SBA’s website for additional information.
Why Is It So Desirable?
It can be difficult for a small business to qualify for a conventional business loan, but a lender’s standards are less stringent for a loan that is guaranteed by the federal government. According to the SBA, it “helps small businesses get funding by setting guidelines for loans and reducing lender risk. These SBA-backed loans make it easier for small businesses to get the funding they need.” A government-backed loan reduces the risk for lenders and increases loan access for small businesses. A win-win!
Additional Reading: How to Start a Franchise With No Money – Is It Even Possible?
What Does It Mean When a Franchise States “SBA-Approved”?
When a franchise indicates that they are “SBA-approved” it means that they’ve already been approved with the SBA for any future loan applications. While a potential franchisee must still provide their own qualifications to receive a loan, the loan application process is simplified since the franchise has already been approved.
SBA loans are a popular option for those pursuing franchise ownership so much so that “about 10% of all SBA loans go to franchises.” It is important to understand the terms of your loan and prioritize your repayments because defaulting on an SBA loan can lead to serious consequences.
Ready to Start Financing?
Figuring out financing is a lot of work and can be difficult to navigate. However, that doesn’t need to stop you from pursuing franchise ownership. A FranNet franchise consultant will guide you every step of the way – from choosing the right franchise, understanding your different funding options, to actually becoming a franchise owner. Even better, they will do this at no cost to you! Contact a FranNet representative to schedule your free consultation today!