Franchisees that need extra funding for their franchise business can look to low-interest SBA loans. Find out which SBA loans are best for franchises and whether you qualify.
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Whether you’re starting a new franchise or growing an existing one, an SBA franchise loan can be a helpful tool. If eligible, franchises can enjoy the flexibility and low rates of a small business loan backed by the SBA.
Keep reading to learn more about SBA loans for franchises and if these loans are the right funding option for your business.
What Are SBA Loans For Franchises?
The Small Business Administration is a federal government agency that supports small businesses with resources like educational materials, training, and small business loan programs.
SBA loans are popular with small business owners due to their competitive rates and terms. Many small businesses, including franchises, are eligible for these funding opportunities.
The SBA itself doesn’t distribute funds to businesses. Loans are funded by SBA-approved intermediary lenders like banks, credit unions, and nonprofit organizations. What the SBA does is guarantee a large portion of each loan. By guaranteeing that most of the loan will be paid for even if the borrower defaults, lenders take on less risk and are more likely to fund small businesses.
What this means is that businesses and franchises that can’t find funding elsewhere may be eligible for a low-interest, long-term loan to use for expenses like equipment, business expansion, or even acquiring a new business.
Types Of SBA Loans For Franchises
There are three types of SBA loans that work for franchises: the Standard 7(a) loan, the SBA Express loan, and the CDC/504 loan.
SBA Standard 7(a) Loans For Franchises
The SBA Standard 7(a) loan is one of the most popular and versatile SBA loan programs. Loans up to $5 million are available and can be used for nearly any business purpose, including:
- Working capital
- Business acquisition
- Refinancing high-interest debt
- Commercial real estate
The SBA has set repayment terms that keep the Standard SBA 7(a) loan extremely competitive. Maximum repayment terms are the prime rate plus a markup. This markup is determined by the borrowing amount and the length of the loan.
||Less Than 7 Years
||More Than 7 Years
|Up to $25,000
||Base rate + 4.25%
||Base rate + 4.75%
||Base rate + 3.25%
||Base rate + 3.75%
|More than $50,000
||Base rate + 2.25%
||Base rate + 2.75%
Repayment terms are up to 25 years for real estate purchases and up to 10 years for all other purposes.
SBA Express Loans For Franchises
Another loan that falls under the 7(a) umbrella is the SBA Express loan. This loan is very similar to the Standard 7(a) loan with a few notable differences.
The SBA Express loan program offers a maximum of $500,000. It can be used for nearly any business, just like the Standard 7(a) loan. Interest rates are set by the SBA and are slightly higher than Standard 7(a) loans but are still competitive. Maximum rates are the prime rate plus a maximum 6.5% markup.
What makes this loan stand out is that an approval decision is guaranteed within 36 hours, compared to 5-10+ business days with the Standard 7(a) loan. While an approval decision is made quickly, processing, underwriting, and funding may take 30-90+ days for the Express loan.
SBA CDC/504 Loans For Franchises
SBA 504/CDC Loans provide up to $5 million for commercial real estate purchases, although some projects may be eligible for $5.5 million. Funds can be used for:
- New construction
- Improvements to existing buildings
- Long-term fixed equipment and machinery
These loans work a little differently than other SBA programs because two lenders are involved. Here’s how funding works:
- A Certified Development Company (CDC) provides up to 40% of project costs
- A third-party lender (such as a bank or credit union) provides up to 50% of project costs
- The borrower pays at least 10% of project costs
SBA 504 loans are fixed-rate loans. Interest rates are based on U.S. Treasury rates. Repayment terms up to 25 years are available.
SBA Franchise Loan Eligibility Requirements
The first step in the SBA application process is to determine if your franchise is eligible for a loan. Then, you can determine if you meet all other requirements of the lender and the SBA.
Franchises That Are Eligible For SBA Loans
Previously, the SBA made it easy to determine if your franchise was eligible with its Franchise Directory, a list that was used by lenders to determine the eligibility of the franchise. However, as of May 11, 2023, the SBA will no longer continue to maintain or support the Franchise Directory.
Instead, this means that it will be up to the lender to vet a franchise. Your lender can help you determine if your franchise is eligible. Hundreds of franchises have been listed in the Franchise Directory in the past, so if you operate a well-known franchise and meet all other SBA loan requirements, the odds are good that your business may qualify.
SBA Loan Eligiblity Requirements For Franchisees
Once you’ve determined that your franchise is eligible for a franchise loan, you — the franchisee — will also need to meet certain requirements set by the lender and the SBA.
The SBA has basic guidelines that all borrowers must meet. To receive an SBA loan, you must:
- Operate a for-profit business
- Engage in business or plan to engage in business in the United States or a U.S. territory
- Meet the size standards of a small business as defined by the SBA
- Have had to exhaust all other means of funding before seeking an SBA loan
- Show that you have the means to repay the loan
- Have a business in an eligible industry
The ideal borrower has an acceptable business history with a franchise of at least two years. Lenders want to know that your franchise will be a success, so the more successful locations your business already has, the better. Popular franchise types include retail, fitness, daycare, food service, and hospitality.
Personal Credit Requirements For SBA Franchise Loans
There are no specific personal credit requirements for SBA franchise loans. However, it is mandatory that you have a strong credit score with a solid credit history. Generally, it is recommended to have a personal credit score of at least 680 to qualify for an SBA loan.
You will need to explain negative items like missed payments or collections to your lender. Certain negative items, including recent bankruptcies, foreclosures, and defaulted government loans, will make you ineligible for an SBA loan.
Collateral Requirements For SBA Franchise Loans
For most SBA loans, collateral is required in the form of business assets. In some cases, personal real estate may be used as collateral.
All owners with at least a 20% stake in the business must also sign a personal guarantee. This makes borrowers personally liable for the debt if they default on the loan.
How To Apply For An SBA Franchise Loan
Once your lender has determined that your franchise is eligible for an SBA loan, the application process is the same as it is for other businesses.
If you haven’t found a lender yet, you can use the SBA’s Lender Match service to find an SBA-approved lender in your area. You can also ask for a referral from your financial institution. There are also online brokers and lenders like SmartBiz and Lendio that can help you get an SBA loan.
During the application process, you will be required to provide information about yourself, other owners, and your business. You will need to choose which loan you’d like to receive, choose your borrowing amount, and explain your purpose for the loan.
Your loan package that will be submitted to the SBA will include your application as well as documentation like:
- Franchise agreement
- Business licenses and permits
- Personal financial statements
- Resumes for all owners
- Federal income tax returns
- Balance sheets
- Profit and loss statements
- Cash flow projections
- Schedule of collateral
- Business leases
If you are applying for the 504 loan, you will need to provide a letter of intent from the third-party lender that explains why the lender is unable to fund the entire project.
Your lender can provide details on additional documentation requirements.
Your credit score and history will be checked to determine if you qualify for the loan. Additionally, the lender will view your financial documentation to ensure that your business is financially sound and able to repay the loan.
If you meet all requirements, your package will be processed, loan underwriting will begin, and funds will be disbursed. The entire SBA loan application process generally takes 30 to 90 days from start to finish.
Alternatives To SBA Franchise Loans
There may be circumstances when an SBA franchise loan isn’t right for your business, such as:
- You don’t meet the basic SBA requirements
- You need fast funding
- You have bad credit
- Your franchise is ineligible
Fortunately, there are many alternatives to SBA loans, including:
- Installment loans
- Short-term loans
- Lines of credit
- Equipment financing
- Invoice factoring
With a little research, you can find the best franchise loan to meet the unique needs of your business.
SBA Franchise Loan FAQs
Can you get an SBA loan for a franchise?
Some franchises can qualify for SBA loans. It is up to the lender to determine if your franchise qualifies, and you will need to meet all other SBA and lender requirements to receive a loan.
Is it hard to get an SBA franchise loan?
SBA loans can be difficult to qualify for, and the application process is quite lengthy. However, you can qualify if you have strong personal credit, steady revenue, and can prove that you’re a trustworthy borrower that is equipped to repay a loan.
What is the best SBA loan for a franchise?
The SBA Standard 7(a) loan, Express loan, and 504 loans are great options for franchises.
What credit score is needed for an SBA franchise loan?
There are no specific personal credit score requirements for an SBA loan. However, it is generally recommended to have a credit score of at least 680 for the highest chances for approval.
The Bottom Line On SBA Franchise Loans
SBA loans for franchises can provide the capital you need to grow your business. While the process can be time-consuming and difficult, the low interest rates and long repayment terms can help you take your franchise to the next level.