Answer: Yes, Small Business Administration (SBA) loans are available for many different businesses, including franchises. They are very similar to any other loan you’d get through the SBA, and the fact that you’re using the funds for a franchise will not really complicate things. Unfortunately, the franchise aspect doesn’t make it much easier to borrow either. There is no specific SBA loan for a franchise purchase -- you’ll use whatever SBA program you would otherwise use (you just happen to be using the proceeds for a franchise).
As with any loan, the lender wants to be as certain as possible that they’ll get paid back. Yes, the SBA helps with this by guaranteeing a portion of the loan, but lenders still have money at risk. As a result, you’ll probably need some kind of collateral to secure the loan, and don’t be surprised if you have to make a personal guarantee to win the loan.
Lenders will want to know how you intend to make money; even though it may be obvious to you, you have to spell it out for them. You may have to provide a detailed business plan with projections, and you may need to have business experience to qualify for the loan. Although the franchise models and training programs claim to provide all the knowledge and resources you’ll need, some lenders only want to lend when somebody with experience will run the business as an active manager.
The SBA keeps track of some lending to franchises, and there is even a list of SBA “approved” franchises. Note that this doesn’t mean that the SBA stands behind the franchise or any claims of the franchisor -- it doesn’t even mean you’re more likely to get approved. Instead, it just means that the loan underwriting process may be a little faster and smoother because the SBA has dealt with that franchise before.
How to get your SBA Franchise Loan
To get a loan, visit with any bank that is an SBA lender. Talk to a business lending representative, and discuss your needs. They’ll explain exactly what the bank needs to grant you a loan. Ask about the interest rate, loan term, and your ability to pay the loan off early. It’s also a good idea to find out how long it takes for funding to be completed, as it may be longer than you think.
In most cases, you’ll have to put 10-20% into the business. In other words, you can’t borrow 100% of what you’ll need to get up and running. Banks want to see that you have some skin in the game; that way, they figure that you’ll be hungry and invested enough to make the business a success. If a portion of your loan is going towards the franchise fee, your lender may decide to pay that portion directly to the franchisor.
If you don’t qualify at the first bank you visit, try again -- every bank is different and will have different requirements. Some banks are eager to lend money and they’ll make it easier, while others already have enough on their books and will intentionally make themselves less attractive. If you get turned away, ask which institutions in your area might be a better fit (you can also ask the franchisor or your franchise broker if they have any suggestions for you).