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Welcome back to another episode of the Investor Financing Podcast! Today, we'll be addressing a commonly asked question: What type of franchises are easiest to get approved with SBA 7a financing? If you're looking to purchase a business and have been exploring franchise options, this information will be valuable to you. Let's dive in!
Exploring the SBA Directory
When considering a franchise for SBA financing, the first step is to visit the SBA directory. While being on the directory doesn't guarantee full vetting by the SBA, it indicates that the franchise is eligible for SBA financing. Currently, most lenders working with the SBA program rely on this directory. However, it's worth noting that changes to the directory may occur in the future.
Homework on Franchise Costs
Once you've identified a franchise on the SBA directory, it's crucial to conduct thorough research. Determine the estimated total project cost, including franchise fees and startup expenses. Depending on whether it's a brick-and-mortar or home-based business, franchise fees can range from $75,000 to over a million dollars, or even several million in some cases. Understanding the financial implications upfront will help you make informed decisions.
Addressing Collateral Shortfall
For franchises without real estate involvement, a collateral shortfall may exist. It's important to be aware of this, as SBA guidelines often require additional collateral. If you're working with a client or are a prospective franchisee, consider the possibility of offering additional collateral such as primary residences or rental properties. In such cases, the SBA might place a secondary lien on these assets. Transparency and understanding the collateral requirements are essential in this process.
Evaluating Franchise Units and Concept
Another crucial factor to consider is the number of units the franchise has established. Franchises with a higher number of units, such as 200 or 300, indicate a well-established concept. On the other hand, franchises with a limited number of units (e.g., 10 or 15) fall under the category of emerging franchise concepts. While financing is possible for emerging franchises, it may be more challenging, especially if the franchise operates in a tough industry like restaurants. Understanding the franchise's unit count and its implications can help you make an informed decision.
Understanding Equity Injection Requirements
When applying for SBA financing, be aware of the equity injection guidelines. The SBA states that at least 10% equity injection is required, but many banks prefer 15% or 20%. Equity injection refers to the amount of personal investment you make into the business. By understanding these guidelines, you can prepare your financing plan accordingly.
Consulting with an Expert
To simplify the process and bypass potential challenges, consider scheduling a 15-minute strategy call with a financing expert. By availing this service, you can receive guidance on preparing the necessary documentation, analyzing franchise concepts, and identifying the right bank or non-bank SBA lending partner. The expertise and insights of a financing professional can significantly streamline the financing process for your franchise.
Conclusion
In summary, obtaining SBA 7a financing for a franchise requires careful consideration of several factors. Start by exploring the SBA directory to identify eligible franchises. Conduct thorough research on the estimated project costs, including franchise fees and startup expenses. Understand the collateral requirements and evaluate the franchise's unit count and industry position. Lastly, familiarize yourself with the equity injection guidelines and consider consulting with a financing expert to navigate the process effectively.
If you're interested in discussing SBA financing or have questions about other financing options, don't hesitate to book a call with us.