small business loan long island

2 Best SBA Loans for Your Franchise Business

Ezra Cabrera | March 12, 2019


    The costs associated with the purchase of a franchise can quickly add up. They can range anywhere from $110,000 all the way up to millions of dollars (for popular franchises like McDonald’s and KFC). While the exact cost depends on the franchise you’re buying, you can expect to pay a hefty amount. Because of that, many franchisors and franchisees usually apply for small business loan Long Island for additional financing.

    When broken down, the costs include:

    • Franchise fees,
    • Royalty fees,
    • As well as a host of other business expenses

    Majority of entrepreneurs prefer SBA loans than various other types of financing due to the flexibility of the program’s terms. There are six different kinds of SBA loans, each of which are designed to address a specific business need. But of the six options, only two are suitable for the purchase of a franchise business.

    The Top 2 SBA Loans for Franchise Purchases

    The best SBA loan for your franchise is the SBA 7(a) Loan and the SBA CDC/504 Loan. Choosing which one is right for your business largely depends on how you intend to use the money. As mentioned, flexibility is one of the advantages of an SBA loan, but every program has its fair share of limitations on how to best use the funds.

    SBA 7(a) Loan

    Applying for an SBA 7(a) loan for the purpose of buying and operating a franchise makes the most sense. Business owners can use these funds for just about anything, whether that be owner-user commercial real estate, equipment, inventory, working capital, start-up costs, and leasehold improvements.

    This particular funding also covers project costs such as initial franchise startup fees (personnel expense, advertising, initial training expenses, and more), furniture and fixtures, initial franchise fees, equipment, as well as working capital needed to fund daily business expenses. It may seem as if an SBA 7(a) loan can cover everything, but in reality it doesn’t cover on-going franchise or royalty fees.

    Business owners can receive loans totaling up to $5 million, and repayment terms can be repaid up to, and over the course of 25 years for real estate, and…

    • 10 years for equipment,
    • 7 years for working capital.

    Currently, the Small Business Administration limits the interest rates at 7.25% to 9.75%. Keep in mind that a lender may also ask you to pay for 10% of the total cost of the loan up front.

    Related: 5 Most Common Uses of SBA 7(a) Loans

    SBA CDC/504 Loan

    Unlike SBA 7(a) loans, SBA CDC/504 loans are SBA loan that is more competitive and offer less flexibility. It is designed to finance franchises looking to purchase, refinance, or renovate fixed assets such as real estate, or equipment. SBA CDC/504 loans are high capital and come with long-term repayment schedules which can extend from 10 to 25 years.

    CDC’s (Certified Development Company) portion of the loan is up to $5.5 million. With a 504 loan, there is no need for you to put up personal collateral because the asset being financed serves as the collateral itself. The interest rates for a CDC/504 loan can range from 4.27% to 6.43% and it is fixed throughout the duration of the loan.

    The SBA CDC/504 loan is best used in funding start-up franchise businesses. The funds you receive will be useful in purchasing equipment or build and renovate the existing location for your franchise. Aside from that the loan can also cover the costs of for the architectural designing and construction of a new building. However, the use of the funds you get will only be limited to these. It can’t be used to fund your business’ day to day operations or be added to your working capital.

    In this arrangement, the SBA doesn’t guarantee the loan in behalf of the bank. Rather, they back the CDC portion of the loan. However, the lenders will still be listed as the first lien for the loan and CDC, the second. This protects the lenders and allows them to offer more favorable loan terms (longer repayment period, lower interest rates).

    SBA 7(a) Loan and SBA CDC/504 Loan

    Did you know that it’s also possible to get both for your franchise business? Since both are designed to serve a specific purpose, you can take out a combination of both loans. You can use the SBA CDC/504 loan to spend on equipment and real estate while the 704(a) will be used as additional working capital. With CDC/504 loan, the franchise owner can avail much larger loan amounts, which means bigger investments.

    Try Small Business Loan Long Island

    Franchising is a great way to establish yourself as an entrepreneur. Whether you’re purchasing a franchise or establishing your franchise business, it cannot be denied that the costs associated with it can be steep. However, this is what a small business loan Long Island is here to help you of. With extra cash along with the SBA loans, you can boost your franchise business, grab opportunities, and grow your business. With enough funding, you can get your business up and running in hardly any time at all.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.