If you have a franchise, can you get funding for it with an SBA 7(a) loan? The answer is yes; in fact, about 10% of all SBA loans go to franchises. Despite that, not all franchises are available for funding through the SBA.
Borrowers Can Use the SBA Franchise Directory to Determine if a Franchise is Eligible
While in the past, borrowers would often use third-party directories, such as FranData, to determine if a franchise was SBA eligible, the SBA now has an SBA Franchise Directory listing all the names of eligible franchises througout the United States. In order to be approved, a franchise must provide the SBA with a Franchise Disclosure Document (FDD), which describes the overall business history, financial health, and general marketing techniques that the franchise uses. After submitting this document, the SBA can decide whether to add it to their directory of approved businesses.
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,” so, in essence, the SBA must believe that the franchise agreement is fair before a franchise makes it onto their directory.
Are SBA 7(a) Loans a Good Source of Funding for Franchises?
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
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, especially for business owners who may not have a strong credit score. Non-SBA loans typically have far higher interest rates and less desirable terms when compared to SBA financing, but often have much lower credit requirements.