By Charles Dean Smith, Jr. CPA

In recent months, the Franchise Team at PBMares has been fielding many questions about Small Business Association (SBA) loans.

For any franchise, access to capital can make or break success.

Whether a franchise is expanding operations, upgrading technology, or navigating through an economic downturn, the availability of financial resources is critical.

What Is an SBA Loan?

The SBA offers many loan programs through lenders that partner with the SBA. SBA loans help franchisees who may not qualify for traditional bank loans and can offer up to $5 million to the borrower.

The loans are government-backed, meaning the SBA guarantees a portion of the loan if the franchise defaults. This guarantee incentivizes the lenders to grant loans and, in turn, makes it easier for franchises to obtain financing.

Benefits of SBA Loans for Franchises

The benefits of SBA loans for franchisees include:

  • Streamlined application process
  • Access even for those with a limited credit history or collateral
  • Low-interest rates
  • Flexible repayment terms
  • Flexibility to combine other financing options that align with a franchise’s unique needs and growth objectives

Types of SBA Loan Programs

The SBA offers various loan programs tailored to the needs of small businesses. Four common types are outlined below.

  • 7(a) Loan Program. Likely the most flexible, this loan program supports a variety of purposes, such as working capital, expansion, equipment purchases, and real estate acquisition. The maximum loan amount is $5 million, and terms generally range from 7 to 25 years, depending on the purpose of the loan.
    CDC/504 Loan Program. This program provides long-term, fixed-rate financing for significant fixed assets like real estate and large equipment. Structured as a partnership between a Certified Development Company (CDC), a lender, and the small business borrower, this type of loan can finance up to 40% of the total project cost, with a maximum loan amount of $5.5 million.
  • Microloan Program. Designed for small businesses and nonprofit child care centers, this program provides small-scale financing of up to $50K. Microloans can be used for working capital, inventory, supplies, furniture, fixtures, machinery, and equipment. (Nonprofit childcare centers can use these loans for facility improvements.)
  • Disaster Assistance Program. Businesses impacted by certain disasters can make use of this program. The loans have low interest rates and can be used to repair or replace damaged or destroyed real estate, machinery and equipment, inventory, and other business assets.

How to Qualify for an SBA Franchise Loan

The franchise will need to meet several eligibility requirements, including:

  • A strong credit score (typically 680 or higher)
  • The owner must have invested equity — such as time or money — into the business
  • Must have tried to find alternative forms of financing before turning to an SBA loan
  • Must be able to demonstrate a need for loan funds and the ability to repay the loan
  • Must be able to show the “sound business purpose” for which you plan to use the funds (by providing financial statements and a business plan)
  • Must qualify as a small business, as defined by the SBA
  • Cannot be delinquent on any existing government debt obligations

Franchises that do the following can improve their chances of being approved for a SBA loan:

  • Present a strong business plan. Include goals, strategies, and financial projections. Demonstrate an understanding of the local market, competition, market share opportunity, profitability potential, and break-even timeline.
  • Be prepared to educate the lender about franchising. Franchising is designed to deliver the same proven business model and results, regardless of market. Share details regarding the franchisor’s history, success rate, and all the support you can leverage for success.

Other SBA Loan Considerations for Franchises

Although SBA loans present numerous benefits, franchisees should carefully consider the following:

  • Manage risk. Think through factors like potential market volatility, revenue fluctuations, etc.
  • Run a cost-benefit analysis. Using savings or a 401k rollover might be a better option for some franchisees. Conduct a thorough cost-benefit analysis to determine which is your best option.
  • Prioritize cash flow. Do the repayment terms of the SBA loan align with revenue projections and operational requirements? Running this type of analysis will help avoid cash flow challenges.
  • Consider delaying the launch. If you’re not approved or don’t love the terms of the loan, delaying the franchise launch might be in your best interest. In the meantime, work to improve your credit and enhance your appeal to a lender. You can do this by paying down debt and building up your savings. Delaying the launch may be a highly strategic move that pays off in the long run.

Best Practices for Managing the SBA Loan Application Process

An SBA loan requires a lot of paperwork and the entire process can become overwhelming. Utilizing best practices, like those outlined below, helps to ensure the process goes smoothly.

  • Seek assistance from an advisor who can develop a solid loan package with financial statements, projections, budgets, and a business plan. It’s always helpful to have someone else look over your final documents before you submit the loan application.
  • Be patient but persistent. Delays in the loan process are common — especially during underwriting. Be persistent and follow up quickly when you’re asked to provide additional documents or further clarification.
  • Carefully analyze loan proposals. An advisor can help with more than just the loan application process. Once you’ve received a loan proposal, consider obtaining support from an experienced advisor to analyze the proposal and the terms being offered.

Amended Regulations re: SBA’s 7(a) Loan Program and 504 Loan Program

Various regulations governing SBA’s 7(a) Loan Program and 504 Loan Program are being amended.

Lenders may require more intense business plan verification and support from franchisors. This is especially true for emerging franchise systems and — even for larger franchises — for applicants new to the system.

In light of the amended regulations, it’s now even more important to present organized financial statements that demonstrate or predict unit-level financial performance information to lenders.

Learn More

With many years of experience serving franchises in various industries, our dedicated franchise team offers comprehensive accounting, management, and business advisory services that can change the trajectory for your business.

Contact us today.