How To Get SBA Loans for Franchises
| 7(a) Loans | 504/CDC Loans | |
| Franchise Uses | Operating and establishing the business, as well as construction of heavy equipment or real estate | acquire from real property and large equipment machinery |
| Eligibility | A small-sized business with a profit-making model in the US and have an equity investment, and have a good credit rating | A for-profit company operating in the US and have an average net worth under $15 million. They also have an annual net income of less than $5 million. |
| Lenders | The majority SBA lending partners | Accredited Development Companies (CDCs) are a means of promoting economic growth in communities |
| Guarantee Percentages | 85percent of loans of up to $150,000. 75% on loans that exceed $150,000. | 100% of the CDC’s share (usually 40 percent of the total loan) |
| Loan Amounts | Maximum $5 million | Maximum $5 million |
| Maturity Terms | 10 years for equipment or capital, and maximum 25-years for real property | Terms of 10 and 20 years |
SBA 7(a) Loan
7(a) loan program is incredibly popular. 7(a) loan program is a well-known SBA loan due to its ability to allow to a variety of applications for the money. Businesses can, for instance, boost working capital, purchase land or equipment or build new buildings and furnish offices. When franchises are involved the type of loan can pay for initial franchise fees, however, not the fees that are associated with the development of franchises.
You could receive up to $5 million of funding through the 7(a) loan. The repayment and guarantee depend on the amount that is funded. The SBA will guarantee as much as 85% for loans that are less than $150,000 or at least 75% on larger loans. Repayment of mortgages for property and other major fixed assets may extend for by up to 25 years while working capital is extended as long as 10.
Note
The rates of interest on these loans can be determined by lenders, however the SBA sets maximum amounts that are allowed. They are a range of the base rate of 2.25% up to 4.75 percentage, depending on loan duration and maturity. The fees also vary between 2% and 3.5 percent depending on the loan’s size.
SBA 504/CDC Loan
The 504/CDC loan scheme is similar to 7(a) with regards to the eligibility criteria and maximum loan amounts however, these loans tend to be used for larger real estate development projects. 504 loans are offered through Certified Development Companies (CDCs) because the primary objective for this type of loan is to encourage economic growth in communities.
Business owners can be granted the sum of $5,000,000 in order to purchase real property, finance construction or buy equipment for long-term use, that are the typical costs to open a franchise. The typical structure for a 504 loan is:
- 50% of the project’s expenses are paid through the loan provider (non-for sure)
- 40% of the project’s cost are covered by CDC (100 100 % for sure through SBA)
- 10 percent of the project’s cost from the lender
The maturity rates for these loans can range between 10 and 20 years for machinery or equipment, as long as 20 years in the case of real estate. The loan comes with an more 3% cost that can be funded through a loan with Fixed interest rate.
Which Option Is Right for Your Franchise?
The 7(a) or 504 loan program are able to benefit you meet the finance needs for your business. The most important factor to consider when choosing between these two programs is the size of your project as well as the way you plan to utilize your loan money.
Let’s suppose you’re opening an franchise in a new site. The main expenses could be construction, real estate, along with long-term machines. A 504 loan might be the better opportunity as it will cover the equipment and property.
If you plan to use the money to run the day-to-day operations of a franchise or buying an established franchise then the 7(a) loan could be a better opportunity. These funds can be used for nearly anything in the field of starting costs, working capital inventory, real property.
Note
A 504 loan could grant cash to purchase the property, however it won’t impart an increase in working capital needed to manage the business as the 7(a) loan might.
How To Apply for an SBA Franchise Loan
The process of applying to get the SBA franchise credit is comparable to the normal loan application. But, you must be prepared to impart the required documents to the lender as well as the franchise.
These are the most important steps to follow in the application process.
Gather Your Documentation
The initial step in the loan application process is gathering the required documents. The more prepared you will be for this first step, the easier your application process will be. Make use of this 7(a) checklist as well as the 504 Authorization File Library to determine what documents are required. This includes documents like financial statements for business as well as individual income tax return and resumes.
Gather the Franchise’s Documentation
The next crucial step is to gather documents focusing around the franchising. It is important to assure that you have the correct documents from the franchise prepared in order to prepare the financing. This may include franchise license agreements as well as profit and loss statements as well as the asking price.
Identify Your Local Lender
Once you’ve completed the paperwork You’ll have to locate an appropriate creditor and/or Certified Development Company to submit your application. The SBA provides a web-based local assistance tool that can benefit you locate accredited organizations near you.
Submit and make up for Questions
The last step is completing the application. It is excellent to be prepared having spent time gathering the required information. But, you might need to be ready for more questions that are based on the lender’s requirements. The lender will then send your application to the SBA in the manner required.
Franchise Loan Alternatives
If you think an SBA franchise credit isn’t the right choice for you, look at the following alternatives:
Franchisor Loans
Certain franchisors add financial assistance for franchisees in order to benefit them get the business up and running. This may include options for loans, reductions in royalty to reduce costs, and secured loans with lender partners.
Traditional Bank Loans
Traditional bank loans is be an feature for companies with greater credit or an established relationship with banks. However the traditional loans usually offer less favorable terms as compared to the SBA loan.
Other Business Loans
Other loan options include a shorter-term loan or an equipment loan. Alternative lenders provide smaller loans with a shorter repayment time and a simple application procedure as well as equipment loans offered by banks or other lenders only cover the purchase of equipment.
The Bottom Line
SBA loan programs are an excellent feature when you require funds for the establishment and operation of an SBA-approved franchise. The two programs, 7(a) loan and the 504/CDC could focus on providing the funds to purchase the necessary materials and real estate as well as rise working capital that can be used for an approved franchise by the SBA.
Based on your specific needs as well as your timeline and franchise, you might want to consider other options for financing like traditional loans. Whatever financing opportunity you decide to go with, assure that you organize your documents and think about consulting a financial well-qualified for specific advice for your particular circumstance.
Frequently Asked Questions (FAQs)
How do you sign up an SBA franchise? SBA?
It is possible to start the franchise in a location that isn’t listed included in the SBA franchise directory. In this situation you may submit a franchise for review by submitting franchise documents, a disclosure form as well as other documents that is required by SBA. Include the contact information of the franchisor.
How difficult is it to secure an SBA franchise loan?
SBA loans are designed to be more affordable to small-sized companies as compared to traditional loans. The procedure to get the SBA loans for franchises is the same as applying for a traditional business loan. You’ll be able to get approved in accordance with a range of aspects such as what size your company and the name for the franchise as well as other things.
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