SBA loans are not issued directly to the franchise owner — rather, various financial institutions across the country finance the loans. However, only business owners whose franchises are listed in the SBA franchise directory can apply. The listed franchises operate business models that meet the SBA’s eligibility criteria.
Full Answer
Does buying an existing franchise qualify for a SBA loan?
The Small Business Administration (SBA) is widely known for its small business loan programs. The most popular is the SBA 7 (a) loan, which can be used for various purposes, including buying an existing business and opening a franchise.
How to buy a business with a SBA loan?
Step 1: Evaluate your qualifications and understand what lenders are looking for.
- Personal Credit Score. ...
- Business Credit Score. ...
- Cash Flow (and Ability to Mive a Down Payment) The cash flow of your existing business acts as a snapshot of its financial health and an indication of whether your ...
- Collateral and Balance Sheet. ...
- Business Plan. ...
- Related Experience. ...
- Business Valuation. ...
- Value Add. ...
- Other Financial Information. ...
What makes SBA loans so appealing to small businesses?
What Makes SBA Loans So Appealing To Small Businesses?
- The SBA Makes Bank Loans Possible. Most small business owners seeking financing won’t have the business credit history, revenue, or even capital needs to make a bank loan worth it ...
- There Are SBA Loans For Businesses At Every Stage. ...
- There Are SBA Loans For Businesses With Every Need. ...
- The SBA Has An Interest In Seeing Borrowers Succeed. ...
Who qualifies for a SBA loan?
Who Qualifies For A Sba Loan?
- You must be officially registered as a for-profit business, and you must be operating legally.
- As the business owner, you can’t be on parole.
- Your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years.
What is the SBA definition of a franchise?
Broadly, the FTC defines a franchise as any continuing commercial relationship wherein: 1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark; 2) The franchisor will exert or have the authority to exert significant control over the franchisee's ...
How do you determine if a business is a franchise?
Franchising: The Legal Definition The business must have a substantial association with the trademark of the franchise. The franchisee must pay a continuing and/or initial fee enter and stay in business. The franchisor provides assistance and control over the franchise.
How do you qualify for a franchise loan?
How Do You Qualify for Franchise Financing?Acceptable personal credit history. Your personal credit score reflects whether you are reliable as a borrower. ... Required down payment. Almost any kind of SBA or conventional business loan will require a down payment.Financial information. ... Franchise information.
What is franchise financing?
What is franchise financing? Franchise financing is how franchisees pay for franchise fees and other business start-up expenses. Most owners cannot afford to cover these out-of-pocket costs and need to apply for a loan.
What is the difference between a franchise and owning your own business?
A franchise is a chance to own your own business, hire a staff, and generate income for yourself–just like a startup. The difference is that in franchising, someone else owns the brand; whereas in a company like Facebook, for example, the brand is property of the entrepreneur, Mark Zuckerberg.
What is the legal definition of a franchise?
Franchise is commonly used to refer to a relationship wherein a business organization, called a franchiser, in exchange for a fee and with the franchisor's guidance, allows another business, called the franchisee, to operate under the franchiser's trade name and offer the franchiser's products or services.
How much do I need to put down for an SBA loan?
10%Do SBA loans require a downpayment? Yes, the minimum SBA loan down payment requirement is 10% on 7(a) and 504 loans and is based on a business's cash flow and collateral. Weak cash flow or low-value collateral can increase the down payment requirement to up to 30% of the loan amount.
Is it easier to get a business loan for a franchise?
Franchise owners benefit from online franchise loans, which have less-strict borrower qualifications than traditional business or SBA loans and put the funds in your account a lot faster. Generally, online loans have higher rates than bank loans.
Can you get a loan for a franchise with bad credit?
If your credit isn't ideal, the best chance you have to get a franchise loan is through the Small Business Administration (SBA). The government guarantees a percentage of SBA loans to borrowers, which decreases the lenders' chance of a loss.
Does bank give loan for franchise business?
Credit unions and commercial banks too offer franchise business financing. However, the process of documentation may test your patience. Your choice institution will study both your personal and business credit scores.
What is the importance of funding in franchising?
Most young franchisors and franchisees need at least one, and typically more than one, capital infusion in order to achieve projected growth. The most common method of acquiring such capital is through venture capitalists or strategic partners. Financing is an essential and continuing need for any business.
What is the most profitable franchise?
Most Profitable FranchisesDunkin'7-Eleven.Planet Fitness.JAN-PRO.Taco Bell.Orangetheory Fitness.Great Clips.Mac Tools.More items...•
What makes a franchise?
A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system.
Is McDonald's franchised?
McDonald's is an equal opportunity franchisor by choice. We seek individuals who are capable of operating multiple locations. Candidates who have successfully operated multiple businesses may be suited to operating several McDonald's franchises.
How do you find out if a restaurant is corporate or franchise?
Related to the difference in ownership are differences in how the businesses operate. If it's a franchise, the owner of the franchise runs the business. The franchise owner is responsible for staffing, day-to-day operations and quality control. If it's a company store that means it is corporate-owned.
How do you tell if a restaurant is a franchise?
With a chain restaurant, one company handles all of the management for the entire business. With chain stores, the parent company retains quality control in each individual restaurant. In the case of a franchise, there's no central ownership actively involved with all of the stores.
Why SBA Franchise Loans?
Owning a franchise is an appealing option for a few reasons. A franchise operates with a model that has already proven to be successful and comes with a corporate reputation to back up the choice in your investment.
How Can Franchise Owners Use SBA Loans?
The SBA loan program has specific requirements for how the funds can be used, which are outlined in the loans’ eligible use of proceeds. In short, the SBA requires that loans are used to improve or establish a site to conduct your business, fund your operation’s soft costs, and/or refinance certain outstanding debts.
Which SBA Loan Program is Right for You?
There are multiple SBA programs business owners may utilize to start or grow a franchise. The type of loan you should apply for depends on the amount of capital your project needs and how you plan to spend the funds. The three most popular SBA loan programs for franchise owners are:
Is My Franchise Eligible for SBA Franchise Financing?
To receive an SBA 7 (a) loan, a franchise must meet universal SBA 7 (a) Loan Program requirements, franchise-specific requirements, and be evaluated by the lending institution as a viable and credit worthy financing candidate. According to the SBA, eligible businesses must:
How to Apply for an SBA Franchise Loan
After you determine that an SBA franchise loan is a good fit for your plans, it’s time to begin the application process. Follow these steps to get started:
What is the SBA Franchise Directory?
The SBA has created the SBA Franchise Directory (the "Directory") of all franchise and other brands reviewed by the SBA that are eligible for SBA financial assistance. The directory will only include business models that the SBA determines are eligible under the SBA's affiliation rules and other eligibility criteria. If the applicant's brand meets the FTC definition of a franchise, it must be on the directory in order to obtain SBA financing.
Does the SBA have an affiliation review?
If a brand agrees to use SBA Form 2462 (Addendum to Franchise Agreement), SBA will only conduct an eligibility review and will not conduct an affiliation review.
Does the SBA include franchises in the FTC?
To help minimize confusion over brands that may appear to be franchises but that do not meet the FTC definition, SBA will include such brands in the Directory at their request if they are eligible in all other respects. Lenders will be able to rely on the Directory and will no longer need to review franchise or other brand documentation ...
What is SBA franchise loan?
What is an SBA Franchise Loan? An SBA Franchise Loan is the funding mechanism that an entrepreneur utilizes with the help of the Small Business Administration to help procure an approved franchise. The subject franchise may be either an existing location purchased through a transfer agreement, or a brand new location that has been approved by the franchisor (corporate). Business loans up to $5,000,000 may be obtained through the Small Business Administration's two most popular business funding programs; the SBA 7a Loan Program and the SBA 504 loan Program. For more information on the SBA 7a or SBA 504, click on the type of SBA loan:
Why are SBA franchise loans so popular?
These loans are extremely popular with business owners due to their favorable terms and relatively low interest rates.
How much can a franchise borrow from the SBA?
The Franchise SBA Loan Program allows businesses to borrow up to $5,000,000 for qualified franchises and businesses. Higher SBA Franchise Loan amounts mean that the lender will require more in terms of sufficient collateral to secure their investment.
How much down payment do you need to make to buy real estate?
The ability to make a down payment of at least 10% if your intended use of funds is to purchase Real Estate, supplies, inventory or equipment.
Does the SBA guarantee a 7A loan?
While the SBA guarantees a large percentage of 7a Franchise SBA Loans and a sizeable portion of the 504 Franchise SBA Loans, your lender is still on the line for the remaining non-guaranteed percentage. The collateral you provide for obtaining the SBA Franchise Loan goes a long way in persuading the lender to loan you the money; offering collateral instills confidence in recovery should you default.
Do CDCs have to review franchises?
Under these changes, Lenders and CDCs will no longer have to review franchise or other brand documentation for affiliation or eligibility.
Can a franchise business be disqualified from the SBA?
If the business applying for the Franchise SBA Loan Program is unable to check all of the above, the business is not automatically disqualified from the program.
How to add a franchise to the SBA directory?
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.
What is a 7A 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.
What is an upstart loan?
Upstart is an online lender that offers consumer loans to qualified borrowers. It has relaxed credit score requirements, competitive terms and fees, and an easy application process. Upstart is an excellent resource for many people who do not fit the traditional model of a loan borrower. Apply Now.
What is an ondeck loan?
OnDeck is a hugely prolific online small business lender and offers two types of business loans: short term loans and revolving lines of credit. Despite potential drawbacks, if you need a fast loan or don’t qualify elsewhere, it's hard to beat OnDeck. Apply Now.
What is merchant maverick?
Merchant Maverick is a highly successful partner referral site which has helped over 1 million business since 2009. We provide high-quality, non-paid, unbiased reviews of business and e-commerce products and services to allow entrepreneurs make better decisions. At Merchant Maverick we make small business simple.
Is the SBA loan process arduous?
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.
Do franchises need capital?
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, ...
How to apply for SBA loan as a franchise owner?
The steps for applying for an SBA loanare similar to any other applicant with one exception: You must first verify your franchise brand is eligible for SBA financing. Confirm your franchise is eligible for SBA financing.
How to determine if a franchise is eligible for financing?
Review the SBA franchise directoryon the SBA website to determine whether your franchise is eligible for financing. When SBA franchise lenders review your documents, they will also reference the directory to confirm your eligibility.
What to do if your brand is not listed in the franchise directory?
If a brand is not listed in the directory, consider asking the franchiser if they have plans to be listed. The directory is updated weekly and there are no application fees.
What happens if you fail to repay a loan?
Alternatively, you may need to secure the loan with collateral — if you fail to repay the loan, then the lender can exercise its right to seize the collateral to recoup its loss.
How long can a 7A loan be?
Terms for a 7(a) loan can extend up to 25 years but will vary depending on the franchisee’s intended use of the proceeds. Interest rates can be either fixed (up to 11.25%) or variable (up to 8%).
What is a 504 loan?
Unlike the general-purpose 7(a) loan, the 504/CDC loan program is for securing major fixed assets, such as machinery and equipment, and can be used for purchasing real estate and remodeling buildings, too. A restaurant franchise owner, for example, may use a 504 loanto purchase commercial kitchen equipment. The 504 loan’s maximum amount for the CDC portion is $5 million, with terms extending up to 25 years.
Does the SBA loan directly to franchise owners?
Keep in mind that the SBA does not issue loans directly to franchise owners — you’ll need to apply through SBA-approved lenders. The SBA’s Lender Match Toolcan help connect you with qualified lenders in your area.
How do I apply?
Businesses may apply for the PPP through any existing SBA 7 (a) lender or other participating financial institution from now until June 30, 2020, but the SBA has warned in its Interim Final Rule on the PPP that the loans are first-come, first-served. As recent events have demonstrated, funds are being allocated very quickly. The PPP Borrower Application Form is available here.
What happens if a franchise is not listed on the SBA Franchise Directory?
If a franchised business is not listed on the SBA Franchise Directory, the SBA’s affiliation rules will apply to determine whether the franchised business will be aggregated for purposes of determining PPP eligibility. If affiliation is found within a franchise system, the businesses will be aggregated. As a result, franchisors and franchisees may be disqualified from obtaining relief under the PPP, or the franchisors and franchisees may face delays in the application process as a result of having to challenge the affiliation determination if the franchised business is not listed on the SBA Franchise Directory.
How to list on SBA franchise directory?
Listing on the SBA Franchise Directory under the traditional category is obtained through an application by the franchisor. The franchisor must typically submit its franchise agreement and FDD. In lieu of submitting its franchise agreement, the franchisor may agree to use a form SBA addendum to the franchise agreement, which removes the disqualifying control provisions from the franchise agreement, to bypass the affiliation determination and be added to the SBA Franchise Directory. Alternatively, the franchisor may negotiate the terms of an addendum with the SBA, removing the disqualifying franchise agreement provisions.
What are the two categories of SBA franchises?
There are now two separate categories on the SBA Franchise Directory: 1) the traditional category, applicable to SBA 7 (a) loans and PPP loans; and 2) the new category, applicable solely to PPP loans.
What is the PPP increase?
On April 23, 2020, the House passed the Paycheck Protection Program Increase Act of 2020 after the Senate unanimously passed the legislation on April 21. The new act adds an additional $310 billion to fund the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). President Trump has committed to signing the act into law. The act sets aside $60 billion for community-based and smaller lenders to assist smaller businesses that were unable to access PPP funds during the first round of loans.
Why did the PPP run out of funds?
Because of overwhelming demand from businesses applying for loans through the PPP since the program’s April 3, 2020 launch, last week the PPP ran out of funds. This prompted Congress to develop a plan to replenish the funds to continue the program.
How much does the Cares Act cover?
The CARES Act allocates a significant amount of federal funds to cover eight weeks of payroll and overhead expenses for small businesses through the PPP. The SBA guaranteed $349 billion in PPP loans for small businesses of not more than 500 employees (with some exceptions) to maintain their payroll during the pandemic.
