If you dream of owning a business franchise – or if you’ve considered business ownership but didn’t think you could afford a franchise – there’s great news for you. Thanks to SBA franchise financing options, there are small business loan programs available to help you achieve your dreams.
In this overview, you’ll learn about your SBA franchise financing options and the SBA loan process for franchises. With this information, you can make informed decisions about the right franchise opportunity for you and your business goals.
What are SBA loans?
The U.S. Small Business Administration (SBA) exists to help small businesses get the financing needed to launch and grow. They have several loan programs available to entrepreneurs when traditional commercial loans, such as bank loans, may be out of reach.
SBA loans and the lenders who provide them, such as Pursuit, offer more flexible eligibility and approval criteria and terms that make loans easier to repay, so that you can focus on your business.
Most types of small businesses, including franchises, are eligible for SBA financing.
How does SBA franchise financing work?
Becoming a franchisee can be a great way to become a small business owner: In exchange for initial and ongoing franchise fees, you gain access to a proven business model, an established brand, and a loyal customer base. You can also choose from a wide range of industries, from restaurants and fast-food chains to janitorial services, gyms, spas, and many more.
However, not all businesses that appear to be franchises are actual franchises, by the Federal Trade Commission’s (FTC) definition.
When you buy a business as a franchisee, the SBA and your lender want to ensure that you gain the benefits a franchise offers, so the SBA put together an SBA Franchise Directory of approved franchises. This gives you and your lender an easy way to determine if a potential opportunity meets SBA franchise requirements.
If a business is listed within the directory, your lender knows that it has been reviewed and is eligible for SBA financing – and with more than 8,000 franchise businesses eligible, there’s a good chance that the one you want is among them.
If a franchise business you want to purchase isn’t currently listed in the directory, talk to your SBA lender. They can provide instructions for the franchisor to apply for review by the SBA and, if approved, be placed in the directory.
What are the SBA loan options for franchises?
Among the range of SBA and other loans available for small businesses, two offer specific advantages for franchises. They are the SBA 7(a) loan and the SBA 504 loan:
- SBA 7(a) loan for franchises: The SBA 7(a) program is great for financing a start-up venture and acquiring an existing franchise that doesn’t include a ground-up construction project. It offers tremendous flexibility for its uses, like franchise fees, marketing, equipment, renovations and leasehold improvements, working capital, and more, with loans up to $5 million.
These variable-rate loans usually have a repayment term up to 10 years, although it can be as long as 25 years when the financing is used for real estate purchases related to franchise acquisition. Most SBA 7(a) loans only require a 10% down payment, which makes it easier to afford the franchise of your dreams. - SBA 504 loan for franchises: If your franchise opportunity includes securing real estate and ground-up construction of a new facility, look into the SBA 504 loan program. For projects of this complexity and higher cost, the SBA 504 offers financing up to $5.5 million.
This loan program also requires a down payment of only 10-15% (compared to 30-40% or more for traditional loans). In addition, it offers a fixed interest rate that stays the same over the life of the loan and a repayment term up to 25 years, making repayment easier to budget for.
Depending on your situation, your lender may also suggest an SBA 504 for construction and equipment components and an SBA 7(a) for the remaining expenses.
How to secure an SBA loan for your franchise
When securing an SBA loan for a franchise business, in addition to the typical loan application and review processes, there are a couple of additional, but easy, steps:
- At the start of the loan process, you’ll provide your lender with an agreement that the business you’re purchasing uses to operate.
- Then, your lender will review the agreement and check the SBA Directory to determine franchise eligibility. Certain franchises listed in the directory may require additional documentation, and if that’s the case for you, your lender will let you know so that you can provide the documents.
- Assuming the business is eligible as a franchise, you’ll simply continue with the remaining application process. If the business isn’t listed in the SBA Directory, your lender can work with you to try to secure inclusion as part of your loan process to make it eligible for financing.
Becoming a franchisee is a popular and potentially very profitable option for small business owners – and SBA lenders can help you get the financing you need to succeed.
Pursuit can help you achieve franchise-ownership dreams
If purchasing a franchise business is your goal, Pursuit has SBA franchise financing and more to help you achieve your dreams.
Pursuit is a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, and Illinois.
We offer loans and a line of credit for working capital, commercial real estate, franchise acquisition and development, equipment, and much more.
We’ve helped thousands of small business owners get the funding they need to achieve their goals and dreams, and we can help you, too.