The SBA and Franchise Financing

Getting a small business loan approved for a franchise through a traditional lender can be difficult. For this reason, some franchisees have had greater success getting SBA franchise financing, particularly thanks to the SBA's franchise registry.

First, keep in mind that SBA franchise financing is coming from a private lender, not the SBA itself. That means, in most cases, you will still be able to choose a lender you feel comfortable working with. You'll just need to contact them in advance to make sure they participate in the program. Some banks simply do not give out loans for franchises.

Second, there are a number of financial benefits. For example, traditional banks ask for much higher down payments - sometimes as much as 50%. With SBA franchise financing, your down payment is usually between 20 to 30%. Additionally, these programs offer lower monthly payments which is going to be important as you start out.

Another benefit is time. For starters, traditional banks generally have 5 to 7 year terms for their loans which means you won't be able to borrow as much because you'll have to pay everything back faster. With the SBA, your loan's term may be as long as 25 years. Plus, the time from application to closing is about six weeks for SBA franchise franchising but much longer through traditional banking channels.

You also don't need perfect credit to be approved. That's important because fewer and fewer of us have those high credit scores that loan officers in banks are looking for.

Another reason to consider SBA franchise financing is because of their franchise registry which simplified the entire process.

Franchisors can voluntarily become part of the registry by submitting all of their paperwork and other information to the SBA to be reviewed. Once the material is checked and approved, the SBA adds the franchisor to the registry. Afterward, any franchisee receives a certification statement from the franchisor basically stating that they are included in the registry. The franchisee hands the certification to the loan officer at his or her private lending institution and this lets them know that all of the paperwork is in working order which means it doesn't have to be reviewed by them or the SBA again. As you can imagine, this cuts down on approval time considerably.

Of course not all franchisors are listed in the registry. This doesn't mean there is something wrong with them or that you should consider them. Because the registry is optional, some franchisors simply choose not to participate. If you do choose to get your franchise from a non-participating franchisor that doesn't mean you won't be eligible for SBA financing. It simply means the loan approval process will take more time.

The bottom line is that you are going to get a loan to finance your franchise, it's in your best interest to check out the programs offered by the SBA. In most cases, they will make it easier for you to get approved and can make the terms of your loan much more favorable. Also, the SBA doesn't always just work with banks so you can check with credit unions, financing companies, and other financial organizations to see if they participate in the SBA programs, too.