December 19

How Do I Fund My Franchise with SBA Loans?

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If you’re considering funding your franchise through an SBA loan, you’re not alone. Many entrepreneurs choose SBA loans for their favorable terms and high loan-to-value (LTV) ratios. Here, we break down the detailed steps and requirements to help you secure funding for your franchise.

What is an SBA Loan?

SBA loans are loans partially guaranteed by the Small Business Administration, making them an attractive option for franchise owners. These loans typically offer lower interest rates and longer repayment terms than conventional loans, making them ideal for small business owners.

Step 1: Identify Your Franchise

The first step is to select a franchise and obtain the Franchise Disclosure Document (FDD). This document provides essential information about the franchise, including financial performance, franchise fees, and legal obligations. The FDD is a critical piece of information that lenders will evaluate during the loan application process.

Step 2: Calculate Total Project Costs

Once you’ve chosen a franchise, calculate the total project costs. These include:

  • Franchise fees
  • Build-out expenses (if applicable)
  • Equipment purchases
  • Working capital
  • Other associated costs

Understanding these costs helps you determine how much financing you’ll need.

Step 3: Meet the Basic Requirements

To qualify for an SBA loan, you’ll need to meet specific criteria. Here’s what most lenders typically look for:

  • Credit Score: A credit score of 680 or higher is generally required. For larger loans, lenders may also use a special SBA credit scoring system.
  • Equity Injection: You’ll need to provide a 10–20% down payment of the total project cost. This can come from your savings, a partner who owns less than 20% of the business, or even a family gift.
  • Post-Close Liquidity: Lenders want to ensure you’re not investing every penny into the business. Having a few months of reserves is essential to cover unexpected expenses.

Step 4: Choose the Right Lender

Not all lenders specialize in SBA loans for franchises. Some banks are more franchise-friendly than others, and it’s crucial to work with a lender or loan broker familiar with SBA financing. If you’re unsure where to start, platforms like BookwithBeau.com can connect you with experienced SBA lenders who fit your needs.

Step 5: Understand Loan Terms

SBA 7(a) loans, commonly used for franchises, have the following typical terms:

  • Loan Term: Up to 10 years for franchise loans without real estate.
  • Interest Rate: Based on the Wall Street Journal prime rate plus a margin, usually around 2.75%.

For example, if the WSJ prime rate is 7%, your interest rate would likely be 9.75%, depending on your creditworthiness.

Step 6: Submit Your Application

With your FDD, total project costs, and basic requirements in hand, you’re ready to submit your SBA loan application. Your lender will guide you through providing necessary documents, including:

  • Business plan
  • Financial projections
  • Personal financial statements

Step 7: Get Creative with Financing

If your equity injection is a concern, there are ways to get creative. Some strategies include:

  • Partnering with investors who own less than 20% of the business
  • Receiving a family gift
  • Exploring other funding sources to supplement your down payment

Resources for Franchise Buyers

For those still searching for the right franchise, consider visiting FranchiseResaleListings.com. This platform offers a curated selection of franchise resale opportunities and sends weekly updates with new listings to your inbox.

Final Thoughts

Securing funding for your franchise with an SBA loan is a structured process, but it’s not one you have to navigate alone. Whether you need guidance on lender selection or creative financing options, platforms like BookwithBeau.com offer personalized support.

By taking the right steps and preparing thoroughly, you’ll be well on your way to becoming a successful franchise owner.


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