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Are SBA 7(a) Loans Available for Franchises?
If you have a franchise, you can get funding for it with an SBA 7(a) loan. Roughly 10% of all SBA loans go to franchises.
If you have a franchise, can you get funding for it with an SBA 7(a) loan?
In a word, yes. In fact, around 10% of all SBA loans go to franchises. Despite that, not all franchises are available for funding through the SBA.
Use the SBA Franchise Directory to Determine Eligibility
The SBA used to maintain an SBA Franchise Directory listing all the names of eligible franchises througout the United States. However, in May 2023, it stopped updating its list, placing eligibility determinations in the hands of individual lenders.
Still, if your franchise is on the old directory, that's usually a very good way to determine if a lender will consider you eligible for an SBA loan.
And if you're not on the list? Don't worry. More and more lenders are learning to adapt and conduct this due diligence effectively, meaning it's by no means a sign you won't be eligible — especially if you use a platform like Janover's to take your loan to multiple lenders.
Still, not all franchisees are eligible.
In general, franchisors that seek to retain significant management rights, operational control, or profits from their franchisees are not eligible. According to the SBA, the “franchisee must have the right to profit from efforts commensurate with ownership.”
Are SBA 7(a) Loans a Good Source of Funding for Franchises?
No: They're an excellent source. First, some terms to familiarize yourself with:
SBA 7(a) loans offer benefits including:
Loan amounts of up to $5 million
Long repayment terms; 7 years for working capital, 10 years for new equipment, and up to 25 years for real estate
Highly competitive interest rates
What are the requirements for an SBA 7(a) loan for a franchise?
SBA 7(a) loans are an excellent source of funding for franchises, as they offer loan amounts of up to $5 million, long repayment terms, and highly competitive interest rates.
In order to qualify for an SBA 7(a) loan for a franchise, you’ll need:
- A credit score of at least 690
- A record free of any bankruptcies in the past three years
- At least a 10% down payment
- A paid franchise fee before the loan funds are released
- A clean criminal history, or the ability to explain any misdemeanors on your record
- No current Federal debt
In addition, the business that will benefit from the loan will generally need to be:
- A for-profit entity
- A small business
- Based in the United States
- A business with invested equity
- A business that has exhausted its other financing options
These requirements ensure that the loan is eligible for SBA backing. If the loan is ineligible, you’ll need to seek other forms of small business financing.
What types of franchises are eligible for SBA 7(a) loans?
In order to be eligible for an SBA 7(a) loan, a franchise must be listed on the SBA's Franchise Directory. Franchisors that seek to retain significant management rights, operational control, or profits from their franchisees are not eligible. According to the SBA, the “franchisee must have the right to profit from efforts commensurate with ownership,” so, in essence, the SBA must believe that the franchise agreement is fair before a franchise makes it onto their directory.
What are the advantages of an SBA 7(a) loan for a franchise?
SBA 7(a) loans offer many advantages for franchises, including:
- Loan amounts of up to $5 million
- Long repayment terms; 7 years for working capital, 10 years for new equipment, and up to 25 years for real estate
- Highly competitive interest rates
- Flexibility in underwriting
- Flexible collateral requirements
- Lenders are prohibited from charging certain fees, including:
- Insurance service fees
- Add-on interest charges
- Legal service fees (with some exceptions)
- Broker referral fees
How long does it take to get an SBA 7(a) loan for a franchise?
It typically takes between 30-90 days to get an SBA 7(a) loan for a franchise. This is longer than some other types of non-SBA loans, but the benefits of an SBA 7(a) loan can be worth the wait. These benefits include loan amounts of up to $5 million, long repayment terms, and highly competitive interest rates.
For more information, please see the following sources:
What documents are required to apply for an SBA 7(a) loan for a franchise?
To apply for an SBA 7(a) loan for a franchise, you will need to submit supporting documentation for eligibility, collateral, or other purposes. This includes a Franchise, Dealership & Licensee Agreement, signed by an authorized agent for the franchise, business purchase agreements, fuel supply agreements, a real estate appraisal if you are using real estate as collateral, business licenses, documentation of former lawsuits, lease agreements, agreement to purchase the business, letter of intent to buy the business, business tax returns for the past three years, any outstanding business debt, long-term business contracts, documentation of business assets, business lease agreement, incorporation documents and/or business license, business plan, SBA Form 1919 (borrower information form), SBA Form 912 (statement of personal history), SBA Form 413 (personal financial statement), financial statements including a balance sheet, profit and loss, and income projection, and documentation of who helped you fill out the application paperwork.
However, SBA 7(a) loans do take longer to fund than some other types of non-SBA loans, and they may be more difficult to qualify for, depending on you and your franchisor's histories.
Note that it isn't always about credit scores with a franchisee loan. A franchisor with a strong track record of success can help offset lender concerns of a lower credit score, and vice versa.
Case Study: Expanding a Franchise in Georgia
Clarissa, an experienced restaurant manager, had successfully been operating an Applebee's franchise in Macon, Georgia, for several years. The restaurant was thriving, and she felt it was the right time to expand her business by opening a second Applebee's location in a nearby town. To make her expansion plan a reality, Clarissa needed funds to cover the franchise fees, build-out costs, and working capital.
While researching her financing options, Clarissa learned about the SBA 7(a) loan program and recognized that it could provide the funding she needed with favorable terms. She decided to apply for an SBA 7(a) loan to help her open her second Applebee's location.
Clarissa put together a comprehensive business plan that detailed her successful track record with the existing Applebee's franchise, as well as the potential growth and profitability of the new location. She also included a market analysis that showed strong demand for another Applebee's in the area.
To her surprise, during the application process, Clarissa discovered that the new location she had chosen had a hidden historical significance – it was built on a former plantation site. This unexpected finding generated local interest and excitement, attracting potential customers who were curious to learn more about the area's history while enjoying a meal at the new Applebee's.
The lender was impressed with Clarissa's thorough business plan, her successful management of the existing franchise, and the potential of the new location with its unique historical aspect. As a result, Clarissa's SBA 7(a) loan application was approved, providing her with the funds needed to open her second Applebee's restaurant.
Thanks to the SBA 7(a) loan, Clarissa was able to expand her business and create new jobs in the community. The new Applebee's location quickly gained popularity, drawing in both locals and history enthusiasts, making it a successful and memorable addition to the area.
This is a fictional case study provided for illustrative purposes.