SBA Lending Uncovered: The Franchise Owner’s Guide to Success

Considering starting a franchise business? Starting a franchise business is a thrilling yet complex journey, filled with a rollercoaster of emotions. On the one hand, there’s the excitement and optimism of becoming your own boss and building something from scratch. On the other hand, there can be anxiety and uncertainty about the challenges ahead. Below we discuss how SBA lending plays a critical role in the franchise process and touch on key items to think about when contemplating a franchise.

Do SBA Lenders Like Franchises?
Small Business Administration (SBA) lenders generally have a positive view of franchise concepts. Franchises often come with existing brand recognition, proven business models and ongoing support from the franchisors, making them less risky compared to independent startups. Lenders value franchises because they tend to have superior success rates due to their proven track records and comprehensive training programs.

Benefits of Using SBA Loans for Franchises: Using SBA loans to fund a franchise offers many unique advantages:

1. Lower Down Payments: One of the principal benefits of SBA loans is the lower down payment requirement. SBA loans typically require a down payment of around 10%, compared to conventional loans that might require 20% or more. This makes it more accessible for aspiring franchisees to secure the necessary funding without a large upfront investment.
2. Longer Repayment Terms: SBA loans often come with longer repayment terms, sometimes up to 25 years for real estate loans and 10 years for non-real estate loans. This increased repayment period results in lower monthly payments, easing the financial burden on franchisees, especially in the initial years when cash flow might be tight.
3. Lower Interest Rates: SBA loans usually offer competitive interest rates compared to other types of loans. These rates are often tied to the prime rate plus a small percentage (called the spread), making them more affordable. Lower interest rates reduce the overall cost of borrowing and improve the profitability of a franchise.
4. Access to Larger Loan Amounts: The SBA 7(a) program, which is the most common type of SBA loan, allows for borrowing up to $5 million. This high loan limit can be crucial for franchisees looking to invest in well-known franchises that might require significant upfront costs. It also gives franchisees more wiggle-room if they are looking to open multiple locations over a short period of time.
5. Support and Resources: The SBA not only provides financial assistance but also offers support services, such as business counseling, training and resources. These services can be critical for new and prospective franchisees as they navigate the challenges of starting and running a business.

Tips for Prospective Franchisees:

1. Research Franchise Opportunities: Not all franchise concepts are created equal. Before selecting a franchise, prospective franchisees should thoroughly research different franchise opportunities. Factors to consider include brand reputation, franchisor support, initial investment costs, as well as the franchisor’s historical success rate. Franchise Disclosure Documents (FDD) provide detailed information about the brand and should be reviewed in detail by a prospective franchisee.
2. Understand the SBA Loan Process: Individuals interested in starting a franchise should familiarize themselves with the SBA loan application process, including the documentation requirement, eligibility criteria and the time it takes to get approved. Working with an experienced SBA lender who focuses on franchise loans, such as VelocitySBA, can help streamline the process and increase the chances of securing a loan.
3. Prepare a Solid Business Plan: A well-prepared business plan is crucial when applying for an SBA loan. It should involve detailed financial projections, a marketing strategy, and an analysis of the local market. Demonstrating a clear path to profitability and an understanding of the subject market can strengthen the likelihood of loan approval.
4. Assess Financials Carefully: Analyze the franchisor’s financial requirements, including the initial franchisee fee, continuing royalties, marketing fees and other costs. Make certain that you have enough capital to cover these expenses and maintain operations until your franchise becomes profitable.
5. Leverage Support Provided by Franchisor: Most franchises offer training programs, support for marketing, and operational counseling. Take complete advantage of these resources to enhance the likelihood of success. Building a strong relationship with the franchisor can provide ongoing assistance and help navigate unforeseen circumstances.

What do SBA Lenders Look for When Analyzing a Franchise?

When considering a prospective loan for a franchise, SBA lenders consider several factors:

1. Franchisor Track Record: Lenders look at the franchisor’s history, including growth, profitability and failure rates. A franchise with a strong historical performance is more likely to receive approval when compared to a newer franchise concept without historical data.
2. Franchisee Experience and Background: The professional experience and background of the franchisee play a large part in the approval decision. Lenders prefer applicants with relevant industry experience or strong business expertise. Showing a clear understanding of the franchise model and ability to manage the business effectively can improve chances of approval.
3. Financial Stability: Lenders assess the financial stability of both the franchisor and franchisee. This includes reviewing the franchisor’s historical financial trends and the franchisee’s personal financial situation. A solid credit history, adequate collateral, strong personal liquidity and acceptable debt-to-income ratios are all critical factors.
4. Market Analysis: Lenders look at the local market to analyze demand for the franchisor’s products or services. A complete market analysis showing strong demand and limited competition can positively affect a loan application.
5. Franchise Agreement and Terms: Lenders review the franchise agreement and FDD to understand the terms and conditions, including royalty fees, marketing fees and franchisee support. A fair and supportive franchise agreement can be a positive factor in the loan approval process.

Conclusion:
SBA lenders generally favor franchises due to their established business models and higher success rates. Using SBA loans to finance a franchise offers several benefits, including lower down payments, longer repayment terms and competitive interest rates. Aspiring franchisees should conduct thorough research, understand the SBA loan process, and prepare a solid business plan to increase their chances of success. By understanding what SBA lenders look for when analyzing a franchise, prospective entrepreneurs can position themselves favorably to acquire the necessary funding and build a successful business.

At VelocitySBA, we have a dedicated franchise team that is here to answer any questions and assist navigating the complicated franchise lending process. By utilizing an experienced SBA franchise lender, you will have a dedicated partner to help ensure the process is smooth and your loan closes faster, leading to the doors opening sooner and making your dream become a reality!

Contact our SBA Experts today!

 Jack Gregoire   Sean Anderson 

 267-418-1169   651-677-8757 

  jgregoire@velocitysba.com   sanderson@velocitysba.com