SBA Franchise Loans: A Complete Guide

If you’re a franchise operator, you know that getting started can be tricky. Franchises offer flexibility and support for owners, but require capital to get started. Chances are, you’ll need an influx of cash at some point during your career as a franchisee. Whether you’re starting a new franchise or growing an existing one, an SBA Franchise Loan can be a helpful tool. As part of their larger mission, the Small Business Administration offers funding for small business franchises that need capital. Once determined eligible, franchises can enjoy the flexibility and low rates of a small business loan, backed by the SBA.

SBA Franchise Loan Eligibility

Applying for an SBA Loan is an arduous process, and for franchises, the process does have an additional step. Thankfully, the SBA has worked to make the extra step a bit easier for larger, more established franchised businesses.

What Franchises Are Eligible For Financing?

The SBA has a simple way for most franchises to determine their eligibility for a loan. The Franchise Directory is a list of all brands reviewed by the SBA. If you find your franchise listed on the directory, it pre-qualifies you for SBA financial aid.

If your franchise has not already been deemed eligible by the SBA, you can apply to be added in the directory by submitting an agreement. You may also be asked to submit a Franchise Disclosure Document (FDD) and other applicable documents. The FDD will ask for information on your business, including its financial history and marketing strategies.

This process does add extra steps to your SBA Loan application, so it is much faster to acquire an SBA Franchise Loan if your franchise is already in the Franchise Directory. If you don’t wish to be added to the Franchise Directory, you have the option of simply applying for an eligibility review for your franchise.

What Eligibility Requirements Do Franchisees Have To Meet?

After your franchise is approved, you as a franchisee must also meet certain qualifications. Most borrowers are required to have management or direct industry experience. You must also have an acceptable personal credit history with no personal or corporate bankruptcies. The SBA has basic guidelines applicants of any loan must meet. This includes meeting size requirements, for-profit business status, and operations within the United States. You must have an acceptable personal background, a business plan, and financial statements. In most cases, you will be required to put up collateral and sign a personal guarantee.

The ideal borrower has an acceptable business history with a franchise of at least two years. Lenders want to know that your franchise will be a success, so the more successful locations your business already has, the better. Popular franchise types include retail, fitness, daycare, food service, and hospitality.

Ineligible For SBA Funding? Try These Lenders

Many businesses find it difficult to qualify for SBA loans, as the requirements are difficult to meet. If you find that you are ineligible for SBA funding, you can check out these alternatives to SBA funding, which are often easier to qualify for and can provide funding faster with less paperwork. Lenders like ApplePie Capital, Funding Circle, and SmartBiz offer some of the best online loans for franchises.

How Can Franchises Use SBA Financing?

To fund your franchise, you will probably need a 504/CDC Loan or a 7(a) Loan. 

General SBA 7(a) Loans

7(a) Loans are the most popular and versatile of SBA Loans. They are backed by the SBA in amounts up to 85%, making them a popular choice for businesses ineligible for traditional business loans. A 7(a) program offers long-term loans, favorable rates, and flexibility. Funds from a 7(a) can be used for short- or long-term working capital, furniture, fixtures, purchasing a pre-existing business, refinancing corporate debt, construction, refurbishment, and supplies.

SBA 7(a) Loan Base Rates (Plus Markup)

Loan Amount Less Than Seven Years More Than 7 Years

Up to $25,000

Base rate + 4.25%

Base rate + 4.75%

$25,000 – $50,000

Base rate + 3.25%

Base rate + 3.75%

$50,000 or More

Base rate + 2.25%

Base rate + 2.75%

SBA CDC / 504 Loans

504/CDC Loans are a more competitive loan product offered by the SBA and Certified Development Companies (CDC). These loans also offer long-term financing and small down payments, but have less flexibility in what buyers may purchase with funds. A 504 Loan can be used for heavy machinery, the purchase of existing buildings, construction, and refurbishment.

SBA 504 Loan Rates & Terms

SBA 504 Loans

Borrowing Amount

No maximum, but the SBA will only fund up to $5 million

Term Lengths

10 or 20 years

Interest Rates

Fixed rate based on US Treasury rates

Borrowing Fees

  • CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)
  • Possible prepayment penalty

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral required; usually the real estate/equipment financed

Down Payment

10% – 30%

What’s The Difference Between A 7(a) Loan & A 504 Loan?

CDC / 504 Loans SBA 7(a) Loans

Loan Size

The CDC portion of the loan has a size limit, but the overall loan can be used to finance larger projects.

Offers flexibility for size projects, but are generally used for smaller sized projects.

Interest Rates

504 loans offer fixed-rate financing, which locks in low rates for the full length of the loan.

Usually has lower fees, but are variable, not fixed, and are adjusted quarterly. Rates typically rise over time.

Prepayment Penalty

High prepayment penalties

Prepayment penalties vary depending on loan

Loan Structure

  • 50% Bank Loan
  • 40% CDC Loan
  • 10% Borrower Down Payment

Varies depending on risk. Minimum 10% down payment for the borrower.

Loan Fees

Fees are negotiated per the 50% bank loan. Can be financed within the 504 loan.

Fees are based on the size of the loan. Can be financed within the 7(a) loan. An extra .25% of fees can be charged on portions of a 7(a) loan exceeding $1 million.

How To Apply For An SBA Franchise Loan

Applying for an SBA Franchise Loan is a similar process to applying for any other type of SBA Loan. Once your franchise has been approved or been confirmed on the Franchise Directory, the process of applying for a loan will remain the same. You will need the following information for your application:

  • Personal Credit History
  • Personal Financial Statement
  • Business Plan

These are all customary documents for an SBA application. You can get started with your application online and be connected with potential lenders within two days.

Final Thoughts

Operating a franchise can be a great way to become a business owner. Franchises offer the independence of a small business with the guidance and support of a larger corporation. If this sounds like a good option for you, an SBA loan program can be another supportive infrastructure to have on your side. While applying for an SBA Loan can be a difficult process, the benefits of flexibility and support are well worth the effort.

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