The SBA & Financing Your Franchise

One of the most underused methods of financing any small business, including franchises, is the Small Business Administration (SBA). The SBA was established in 1953 through the federal government to provide assistance to new entrepreneurs looking to start small businesses. The SBA provides a number of financing services which could be valuable to you as you begin raising the cash you need to pay for your franchise.

The SBA is not a lender itself. Instead, the SBA works to guaranty loans for small businesses. This makes it easier for your loan to be approved because at least part of the lender's risk will be covered in the event that you cannot pay off the loan.

However, the SBA does have some requirements before you can receive a loan. These requirements, however, should not be difficult to meet if you have already been approved for a franchise through your franchisor. For example, the SBA does expect you to have some equity in your business meaning you need to put up a portion of the funds on your own, usually at least 10%.

You will also need collateral and good credit. The SBA and its lenders also like to see that you have some business experience related to the business you are opening. That doesn't mean you have to have previous entrepreneurial experience, but it does mean that you should think of ways that your past work experience has prepared you for this new and exciting step in your career.

Back in the early 1990's, the SBA started the Preferred Lender Program (PLP). The program's purpose was to expedite the processing of small business loans by giving certain lenders the ability to approve the loan. Before the PLP program, the SBA approval required a lot of additional waiting time because their processors were swamped with requests. Today, most PLP lenders can give you an answer in three business days.

The majority of banks in the United States are part of PLP. Some are also part of the SBA LoanExpress program. With this program, the banks can approve the loan and can approve a guaranty of 50% for the loan through the SBA.

Before you start the loan process, you should contact your bank to determine if it participates in either of these programs. The SBA also maintains a partial list of PLP participants, but it may be just as easy for you to call your bank up yourself.

The most common loan program offered by the SBA is known as the 7(a) Guaranty Loan Program. With this program, the loan does not come from the government or the SBA, instead it comes directly from a lender. The SBA, however, guarantees that at least a portion of the loan will be repaid to the lender if you default.

To participate in the program, you have to first approach a lender who participates in the program. The majority of banks in the United States do, but you should check with lenders in your area first. After the lender reviews your application, they decide whether or not your application is strong enough on its own or if you need a guaranty through the program. Don't feel bad if you need a guaranty - unless you have a great deal of business experience, perfect credit, and/or a lot of equity in your business, needing a guaranty is common.

The lender then contacts the SBA who agrees to guaranty a percentage of your loan, usually 75%. That means if, for some reason, you are unable to pay back the loan, then the SBA pays three-fourths of the loan amount back to the lender. Because this gives the lender some protection against loss, they are more willing to approve your loan.

Another loan program available through the SBA is known as the CDC/504 program. The purpose of this program is to fund businesses which help with the economic development of communities. These loans, therefore, are more long-term and have certain stipulations which other small business loans do not.

These loans are meant to finance the fixed assets of your business, such as the building or remodeling of your business. The funds can be used for landscaping, building a parking lot, buying equipment, and doing renovations. Because these assets are used as collateral for the 504 loans, you do not need any additional collateral.

1. In most cases, the loan is not provided by the SBA. Usually, you will be financing this part of your business through three sources. Typically, you will be required to have 10 to 20% of the amount needed yourself. Up to 50% of the amount needed is then secured through a private lender while the rest is received through a Certified Development Company (CDC). A CDC is a corportation established for the purpose of economic development. They are non-profit agencies. The SBA has a list of participating CDCs at www.sba.gov The portion of the loan supplied by the CDC is guaranteed 100% by the SBA.

As part of the conditions of the 504 loan program, you must meet certain employment requirements. Since the whole idea of the program is to provide economic development, you must employee at least person for every $50,000 you borrow. Under some circumstances, your hiring requirements may be greater or fewer. That means if you borrow $500,000 to purchase equipment for your franchise, then you will need to employ at least 10 people. That's not much of a requirement for most franchise operations.

In most cases, you are going to be most interested in the 7(a) loan program because the funds can be used for any part of starting up your business and do not require you to employ a certain number of individuals. That provides you with more flexibility. However, the 504 program is worth keeping in mind as a way to finance the brick and mortar aspects of your franchise.