SBA loans are attractive to small businesses, including franchises, for their low rates and long terms.
In 2014, according to the International Franchise Association, the U.S. Small Business Administration (SBA) guaranteed over $6 billion in loans to 30,000 franchises! So does opening a franchise as opposed to a regular startup increase your chances of being approved for an SBA loan?
The answer is yes. Regardless of the type of business you are starting, you’ll need to meet certain minimum approval criteria. If you don’t have a personal credit score of 650+, relevant industry or business management experience, and the ability to make a down payment of 20% or higher, most lenders will not consider you for an SBA loan, franchise or no.
Once you move past minimum eligibility, however, it becomes much easier to get an SBA loan for a franchise than a non-franchise startup. That’s great news, because SBA rates are some of the lowest available to small businesses. You can find out your projected monthly payment using this SBA loan calculator.
The Advantages of Opening a Franchise
Before giving a loan, lenders want to be as sure as possible that the borrower will pay it back. Franchises give the lender more certainty because they have a track record and are standardized in how they are run.
Franchises have a track record independent from the borrower, so there is less uncertainty as to how the business will perform. By law, every franchisor must provide a Franchise Disclosure Document (FDD) to franchisees. The FDD contains valuable information such as historical data, on profit margins and business expenser. Using this data, lenders can gauge the potential success of a franchise.
In addition, management decisions in a franchise are standardized. The franchisor controls many aspects of the business such as product pricing and store display. Uniformity of these factors makes a lender more comfortable when giving a loan.
The Franchise Registry is a listing of franchises whose loan applications receive expedited review from SBA lenders. The Registry, maintained by a private organization named FranDATA, lists franchises whose FDDs have been pre-approved by the SBA, thereby shortening the loan process. Lendesr can also look up how many SBA loans have been taken out for particular franchises and the success and default rate of those loans.
If a franchise has a lot of outstanding SBA loans with a high success rate, it’s likely that the borrower will be able to pay back the loan. In addition, the lender doesn’t have to investigate the franchise from scratch if information about it is already in the Registry. Many franchises can even connect you with a preferred bank partner to get SBA financing.
It’s not easy to get an SBA loan for a new business. If you at least meet the minimum requirements, you may be in luck if you’re opening a franchise. All else being equal, it is generally easier to get an SBA loan for a franchise than for a non-franchise startup.
Thank you to Fit Small Business writer Priyanka Prakash for sharing her expertise. A business analyst and writer, Prakash’s areas of expertise also include small business lending, credit cards, credit scores, and other aspects of small business finance.
Note: In order to qualify for a SmartBiz SBA loan, you must have been in business for two years. Please contact SmartBiz for specific information regarding franchise funding at firstname.lastname@example.org or 866-283-8726