SBA 7(a), CDC/504 loans are available to franchisees who want to obtain an SBA loan. The U.S. Small Business Administration partially guarantees these SBA loans and they are issued by banks and credit unions.
You must meet strict lending requirements to be eligible for an SBA loan. To be eligible for financing, your franchise must be listed in the SBA Franchise Directory.
This is a summary of the SBA loan options for franchises. It also explains how to obtain the funding you need.
What amount do you need?
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SBA loan options
Franchise owners have two options for financing their franchise: SBA 7(a loans or SBA CDC/504 loans.
SBA 7 (a) loans
SBA 7(a), loans are issued by lenders like credit unions or banks and partly guaranteed by the SBA. These loans are the most popular type of SBA loan. They can be used to purchase equipment, working capital, or for business expansions and renovations.
SBA CDC/504 loan
SBA CDC/504 loans can be administered by certified development companies (CDCs) and are partially backed by SBA. Unlike 7(a), however, funding for CDC/504 loans is sourced from three sources.
A development company that is certified (40%).
Third-party lender, typically a bank or credit union (50%).
The loan is taken out by the business owner (at least 10%).
SBA CDC/504 loans cannot be used for equipment, land, or real estate purchases. These loans can also be used to improve existing facilities, such as roads, utilities, parking lots, and streets.
CDC/504 Loans cannot be used to purchase inventory, working capital, consolidating, refinancing, or repaying any debt.
SBA loans for franchises, compared
Prime rate + 2.25% to prime rates + 4.75% depending on loan amount and terms. Rates currently range from 10% to 12.5%.
How to obtain an SBA loan for a franchise
You will need to verify that your business is eligible for financing. Then, contact a lender and complete an application.
1. Check your business’s qualifications
Lenders typically require at minimum two years of business experience, strong annual income, and a high credit score (which starts at 690). The general requirements for an SBA loan are also required. You must have a for-profit company that is based in the United States, meet the SBA definitions of small businesses, and be in an approved industry.
You may need to fulfill program-specific requirements depending on which type of SBA loan is chosen. SBA CDC/504 loan borrowers, other than small-scale manufacturers, must create or maintain at least one job per $75,000 of SBA funding.
2. Check that your application is approved
To be eligible for SBA financing, franchise businesses must fulfill additional requirements. To confirm your franchise’s listing in the SBA Franchise Directory, you will need to go to this link. You will not be eligible to receive funding if your franchise isn’t listed.
You will need to work with your franchisor in order to submit the required paperwork to the SBA Franchise Team for review.
3. Select a lender
There are many factors that will determine the right SBA lender for you franchise. These include whether you need a 7(a), CDC/504 or a 7(a). You should look for an SBA lender that has a track record of issuing loans, simplified application processes, and dedicated loan specialists.
Start your search by calling a bank or credit union with which you are familiar and asking about SBA loan options. The SBA Lender Match Tool allows you to answer some questions about your company. Within two business days you will receive an email with potential lender matches.
Ask questions about the loan terms, interest rates, and qualifications requirements before you make a decision on a lender. To help you decide if the lender is right for you, ask about the application process.
4. Send your application with all required documents
The requirements for an SBA loan can vary depending on the lender and type of loan. You will typically be asked to:
SBA loan application form also known as SBA Form 1918.
Personal financial statement also known as SBA Form413
A personal history statement, also known by SBA Form 912.
Financial statements for business, including income statements and balance sheets, as well as cash flow projections.
Income tax returns.
A detailed schedule of collateral.
Existing debt schedule, if applicable.
Licenses and certificates for business.
Loan application history.
Resumes to be used by business owners.
History and overview of Businesses.
Your franchise agreement will be required as part of your application if you are a franchise company. SBA Form 2462 (Addendum To Franchise Agreement) will be indicated in the SBA Franchise Directory.
Funding can take up to 30 days after you submit your application.
Alternatives for SBA franchise loans
You may not be eligible for an SBA franchise loan or you want to explore other options.
Get a loan for your small business to help you realize your goals.
Find the funding you need for your business. Compare your options and check out NerdWallet’s top picks for small-business loans.
Your franchisor may be able to help you get financing for your company. Your franchisor might offer discounts on franchise fees, standard business loans or other incentives depending on your brand.
Guidant Financial is a lender that The UPS Store works with to assist its franchisees in obtaining 401(k), SBA loans, portfolio loans, and unsecured loans. The brand waives the franchise fee for qualified veterans, and offers a discount fee for minority-owned businesses.
Short-term loans for business
If you require a shorter loan term or quicker funding, online lenders may be able to provide short-term loans for your business. Most loans have a repayment term of one year or less. However, some lenders might offer terms up to 18 and 24 months.
Short-term loans are a great option for many reasons, including working capital, cash flow gaps, or taking advantage a new franchise opportunity.
Short-term lenders, unlike SBA loans have flexible qualifications and simplified applications that require minimal documentation. Short-term loans may be funded in as little as 24 hours.
Although these loans are expensive, interest rates range from 10% to 99 percent.
An equipment loan is a great option if you have equipment to purchase for your franchise but aren’t eligible or need financing faster than an SBA loan.
Equipment financing is a way to obtain a loan that covers up to 100% of your equipment purchase price. This depends on the qualifications of your lender and the business. Equipment financing terms are usually based on the expected life of the equipment.
Equipment financing is often easier than other types business loans because the equipment you buy serves as collateral. When applying for a loan, you may not have to rely on the standard criteria such as personal credit, time in business, or collateral.
Online lenders and banks can both finance equipment. While banks will offer the best rates and terms, they will have strict requirements and may be slow to fund. Although online lenders might have higher interest rates than banks, they are generally easier to apply for and offer faster access to financing.
Get the right loan
The best business loan is the one that has the lowest interest rates and the best terms. Other factors, such as your time and business qualifications, can also influence which loan option you choose. NerdWallet suggests comparing small-business loans in order to find the best fit for your company.
The original version of this article appeared on Fundera (a subsidiary to NerdWallet).