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Business Owner's Guide to SBA Franchise Term Loans

Business Owner’s Guide to SBA Franchise Term Loans

Many entrepreneurs see owning and opening a franchise as a perfect way to become a small business owner. Knowing how much you will need to invest on the front end for the franchise fee and expenses to set up your operation will dictate the amount of capital and financing you will need.

Whether you’re starting a new franchise or growing an existing one, an SBA Franchise Loan can be a solution to help you fund your business. The Small Business Administration has partnerships with numerous banks and lenders across the country. As part of their larger mission, the SBA offers funding for small business franchises that need capital.

The standard SBA loan for franchisees is known as the 7(a), which is issued by a bank or qualified lender, and partly guaranteed against default by the government. If you’re in the process of starting a new business, then SBA microloans may be your best option. The other option is a 504/CDC loan program. With an SBA 504 loan, money can be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment.

Here's a breakdown of SBA Franchise Loans:

7(a) loan program

The 7(a) loan is the SBA’s most popular product for small business owners and one of two products offered to franchise owners. The 7(a) loan can be used to cover the cost of property, furniture, machinery and other business assets. Loans can be issued in amounts up to $5 million, and the maximum term limit is 25 years for purchase of real estate and a maximum term of 10 years if purchasing business assets.

504/CDC loan program

The 504 loan, also referred to as the Certified Development Company loan, finances real estate and equipment purchases for small business owners. The loan can be used to buy land, existing buildings, machinery or new facilities.

To qualify, franchise owners must have a net income of $5 million or less after taxes during the two years prior to applying. The franchise business must also be worth less than $15 million. 504/CDC loans can be issued in amounts up to $5.5 million with terms ranging from 10 to 25 years. A fixed interest rate is determined when the loan is awarded, though rates are usually lower on these loans than they would be on 7(a) loans.

How to apply for a SBA Franchise Term Loan?
If your franchise appears in the SBA’s directory, you could then apply for financing from an SBA-approved lender. Working with your lender, they will review your credit report to determine if you demonstrate the “5 C’s” of SBA loans: Capital,credit,collateral,capacity, andcharacter. You will need to submit a loan application and additional paperwork. The truth is, SBA-guaranteed loans generally are available to any small enterprise whose owner can demonstrate a sound business plan and a responsible approach to finance. It’s still wise to be prepared by having these items organized and updated:

Business plan:
Most lenders want to see your business plan for your franchise.
Loan amount:
You’ll need to disclose how much capital you need and your plan on how you will invest that into your business.
Credit history:
Your personal credit score will provide your lender with a thorough picture of your credit worthiness.
Financial projections: Your lender will look for cash flow history and projections for the business, and how you plan to pay off the loan.
Showing that you can offer collateral such as home, property or inventory serves as a backup source of payment.

Do not overlook the SBA’s financing and loan programs for growing your business or launching a franchise.

To help start the process, The SBA has created the SBA Franchise Directory, so you can quickly see if your franchise of choice is eligible for financial assistance.

The Savoy Banking Lending Team is here to help answer your questions and determine which SBA loan is right for you!


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