Franchise Business Loan:
How to Get an SBA Loan for Your Franchise
Franchise Loans for Your Franchise Business
Dreaming of owning a franchise? The freedom, brand recognition, and support of a franchise system are all appealing, but getting started often requires significant funding. If you're ready to turn your franchise dreams into reality, securing a Small Business Administration (SBA) loan could be the key to getting the financial support you need.
In this article, we'll explain everything you need to know about your SBA loan options to buy a franchise. We'll also cover the other loan programs available, so you'll be well-equipped to make informed decisions and confidently take the next steps toward franchise ownership. Whether you're eyeing a popular fast-food chain or a niche boutique concept, understanding your financing solutions is crucial for a successful franchise venture.
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SBA Loans: Your SBA Franchise Business Loan Options
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SBA 7(a) Loans
SBA 7(a) loans are an excellent financing option for funding your franchise. These loans are backed by the U.S. Small Business Administration and are provided by partnered lenders. They come with attractive features for franchise businesses, including competitive interest rates, long repayment terms of up to 25 years for real estate, and access to significant funding of up to $5 million.
Another benefit of SBA 7(a) loans is the SBA guarantee, which reduces the risk for lenders and increases your chances of approval compared to traditional bank loans. This makes SBA 7(a) loans a great option for aspiring franchise owners who might not qualify for other financing options.
To qualify for 7(a) loan assistance, businesses must:
Be an operating business.
Operate for profit.
Be located in the U.S.
Meet the SBA's definition of a small business.
Not belong to any categories of ineligible businesses.
Have good credit and show that they can reasonably pay back the loan.
Not be able to get the needed credit from private or government sources under reasonable terms.
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SBA CDC/504 Loans
Franchise ownership often requires significant upfront costs for real estate, renovations, equipment, etc. The SBA offers the CDC/504 loan program to address these financing needs. This program functions as a three-way partnership:
Certified Development Companies (CDCs): These non-profit organizations manage the program and contribute a sizeable portion of the loan.
Lender: Traditional banks or alternative lenders also provide a portion of the funding.
Franchise Owner: You, the franchisee, contribute a down payment, demonstrating your stake in the business.
The CDC/504 loan focuses on long-term financing with extended repayment terms, so it’s best to buy assets requiring a longer payback window. However, remember that these loans are restricted to fixed assets only. You can’t use a CDC/504 loan for everyday operational needs like working capital or inventory. One exception is the potential to refinance existing debt incurred for acquiring fixed assets.
Here are a few key requirements to meet if you’re interested in a 504 loan:
Your business must operate for profit and be located in the United States.
Show a healthy financial track record. This includes having a tangible net worth under $15 million and an average net income after taxes of less than $5 million for the past two years.
The SBA also considers your business qualifications. This means having qualified management expertise, a realistic business plan, a good credit history, and the ability to repay the loan.
The loan cannot be used for non-profit activities or passive or speculative ventures. The funds must be used for approved purposes like buying land, buildings, or major equipment.
NOTE: To increase your chances of qualifying for an SBA loan, you need an excellent credit score, a solid financial track record, and at least two years of business history to qualify. Visit the SBA's website for more information on SBA loan application form, SBA loan process, and more.
Ready to apply for Franchise Business Loan?
Tips to Increase Your Chances of an SBA Loan Approval
Here are some steps you can take to improve your chances of getting approved for SBA franchise loan options:
Before You Apply
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Understand the Lender’s Criteria
Different banks and online lenders have varying criteria when considering loan applications. They typically assess factors like your credit score, business financials, relevant experience, and the purpose of the loan. It’s best to aim for a credit score of at least 675, as it’s often seen as a market of financial responsibility and reliability.
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Craft a Compelling Business Plan
Your business plan serves as a roadmap for your business, outlining your goals, financial projections, and how you plan to use the funds. Business owners often tend to become overly ambitious when making their business plans, so make sure that your plan is not only comprehensive but also realistic. It should demonstrate a clear path to profitability. This document shows lenders that you have a solid understanding of your business and its potential for success.
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Gather Financial Documents
Lenders will want to see a detailed overview of your financial health. Gather essential documents such as tax returns, bank statements, credit report, and business financial statements. Having these organized and readily available streamlines the application process and provides lenders with a clear picture of your financial standing.
When You Apply
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Choose the Right SBA Franchise Loans
There are different types of SBA loan programs tailored to different business needs. Take the time to research and identify which program aligns best with your requirements. Each program has its own eligibility criteria and purposes, so selecting the most suitable one is essential for a successful application.
This process can be confusing, so we’re here to help you choose the best loan option for your business.
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Partner with an SBA-Approved Lender
You can only apply for an SBA loan through SBA-approved lenders. We are well-versed in SBA loan requirements and can provide valuable guidance and support throughout your application journey. We understand the intricacies of the process and can help you address any challenges that may arise.
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Be Prepared to Answer Questions
During the application process, be prepared to answer detailed questions about your business. Lenders will likely ask about your experience, market opportunity, and how you plan to repay the loan. Being able to provide thorough and confident responses demonstrates your preparedness and commitment to your business.
Alternatives to SBA Franchise Loans
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Business Line of Credit
A business line of credit is like a credit card for your business. It gives you access to a pre-approved amount of cash you can tap into whenever you need it. You only pay interest on the money you actually use, which is excellent for covering unexpected expenses or seasonal dips in sales.
Franchise business owners can benefit greatly from a line of credit. It provides a safety net for emergencies, like sudden repairs or inventory shortages. It also allows them to take advantage of unexpected opportunities, like buying additional supplies during a promotional sale. Plus, the flexible nature of a line of credit means they only pay interest on what they use, keeping their finances under control.
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Business Term Loan
A business term loan is a lump sum of cash you borrow from a bank or lender to invest in your franchise. Unlike a credit card, it has a fixed repayment term, meaning you’ll pay back the loan with interest in equal monthly installments over a set period, like 2 to 5 years. A business term loan usually offers short-term business loans, medium-term business loans, and long-term business loans.
This is a great option for franchise owners needing funding for bigger expenses, like buying equipment, renovating their space, or launching marketing campaigns. The predictable payment structure helps with budgeting, and the loan amount can cover what a credit card might not. With a term loan, franchise owners can make strategic investments to grow their business without worrying about maxing out a credit line.
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Asset-Based Loan
An asset-based loan uses your business’s existing assets, like equipment, inventory, or even outstanding invoices, as collateral for a loan. The lender sees these assets as a safety net and will lend you money based on their value.
This can be a good option for franchise owners with a newer business or limited credit history. Since the loan is based on what you already own, asset-based loans can be easier to qualify for than traditional loans.
Franchise owners can use the money for various needs, like covering payroll during a slow month or expanding their inventory to meet higher demand. It’s a flexible way to get funding without putting your personal assets on the loan. However, keep in mind that if you can’t repay the loan, the lender could seize the collateral you used.
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Equipment Financing
Equipment financing is a popular option for franchise owners because it allows them to acquire the machinery and technology needed to run their business without a significant upfront cost. Here’s how it works: a lender pays for the specific equipment you need, and you repay them with interest over a fixed term.
This approach frees up your cash flow for expenses like hiring staff, launching marketing campaigns, or covering operational costs. For franchise owners, this can be particularly helpful because complying with brand-specific with brand-specific equipment requirements can be expensive. Equipment financing allows them to buy ovens, refrigerators, freezers, specialized software, or any other essential tools needed to operate their franchise.
Ready to apply for Franchise Business Loan?
How You Can Benefit From Franchise Financing
Small business owners know the challenges of finding the right business to franchise. However, finding the right small business financing can be even more difficult. At SMB Compass, we understand that franchises need working capital to succeed. We are committed to your success and strive to provide unbeatable business loans to help you achieve it.
With that in mind, here are a few ways you can use franchise financing to generate a maximum ROI:
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Franchise Fee Payment
Franchise ownership often involves an initial franchise fee. This upfront payment, typically ranging from tens to hundreds of thousands of dollars, grants you the right to operate under the franchisor's brand and system. The fee varies by industry and brand popularity, but it generally covers initial training, site selection assistance, and ongoing support.
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Royalty and Marketing Fees
In addition to the initial franchise fee, franchisors typically collect ongoing fees from franchisees. These fees are usually based on a percentage of the franchisee's sales. Royalty fees compensate the franchisor for the ongoing use of their brand name, business model, and intellectual property. On the other hand, marketing fees fund advertising and marketing campaigns that benefit the entire franchise system.
The percentage for royalty and marketing fees varies depending on the franchisor and industry. They typically range from 5% to 9% of gross sales for royalties and 2% to 5% for marketing fees.
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Additional Working Capital
Many businesses need additional working capital to operate smoothly, especially during seasonal sales fluctuations, cash flow challenges, or business expansion. An SBA franchise loan can help you bridge the gap and ensure you have enough funds to cover your ongoing expenses. Even if you're unsure of the exact amount you need, planning for future growth will likely require extra working capital.
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Inventory
Most businesses apply for an SBA franchise loan to increase their working capital. Seasonal sales fluctuations, cash flow problems, and business expansion are just a few reasons franchisees apply for a business loan. You might not know how much money you need, but as your business grows, you’ll need extra working capital.
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Equipment
Like other businesses, franchisees need equipment to carry out their day-to-day operations. It could be a photocopy machine, an ice cream maker, a car, or machinery that will help them boost their revenue. Unfortunately, equipment purchases tend to cost a lot. With the different SBA loan options, the franchise owner will have the capital necessary to purchase the machinery and avoid potential cash flow issues.
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Payroll
If your franchise is prone to fluctuating revenue, especially during the slow season, it may be harder for owners to meet the business's month-to-month financial demands. Sometimes, this could also mean that payroll might be delayed.
To avoid late payments to your employees, applying for franchise financing options can give you the capital you need to pay your employees on time and avoid high employee turnover rates and low employee satisfaction.
Ready to apply for Franchise Business Loan?
Common Questions. Straight Answers.
Yes, you can absolutely take out a business loan to fund your franchise. In fact, securing financing is a common step for many aspiring franchise business owners. Traditional lenders and online lenders offer different types of loans tailored to your business. These loans can cover startup costs, franchise fees, equipment purchases, real estate acquisition, and working capital needs.