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Can You Use an SBA Loan for a Franchise?

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In many cases you can utilize an SBA 504 to finance the acquisition of a franchise. However, there are a few criteria you must meet in order to qualify. Read our blog to learn about the SBA loan franchise requirements and what ways the loan can help your business. 

What is the SBA Franchise Directory?

Before proceeding with a loan application, you may wish to review the SBA Franchise Directory to see if your potential business is listed. This directory is a list of franchises that have been vetted by the SBA as those that fall within their financial parameters. Some franchises are too lucrative to qualify as a “small” business and, therefore, are ineligible for a SBA loan. 

That being said, just because you do not see your potential franchise listed does not automatically mean it does not qualify. As of May 2023, the SBA no longer maintains the franchise directory. This means your business may still be eligible for funding, so long as it meets the SBA 504 lending criteria. 

You can work with your franchisor to obtain additional documentation to support your eligibility. Make sure to ask for the following, in particular:

Franchise Disclosure Document (FDD)

The FDD will be one of the most important pieces of your application for an SBA loan. It is a detailed document providing extensive information on the inner workings of the company, covering everything from past litigation to location restrictions for franchisees. In essence, it demonstrates the franchise’s level of risk and chances for success. 

Satisfaction Summary Report (SSR)

You can also request this report from your franchisor to submit along with your SBA application. The SSR is an independent review of how other franchisee’s rate the brand on financial returns, company support, and leadership quality. It can provide vital insights into the credibility of the franchisor and any associated risks.  

What SBA Loans Are Available for Franchises?

You have two options for a franchise loan through the SBA: the 7a or the 504. In general, the 504 is considered preferable for financing fixed assets, including real estate, for a few reasons:

  • Fixed interest rate: the SBA 504 has a fixed interest rate vs the variable rate of the 7a. Borrowers do not have to worry about sudden spikes or dips in rates, allowing for better financial planning.
  • Longer repayment terms: the 7a loan maxes out at ten years for business acquisition and certain fixed assets, like equipment. The 504 increases this loan term to up to 20 years for borrowers. 
  • Lower down payment requirements: the SBA 504 loan requires a downpayment of 10 percent, whereas the 7a may require as much as 20-30 percent. 

The only reason you would want to apply for a 7a in place of the 504 is if you needed working capital. The 504 loan is for fixed assets only. 

SBA 504 Franchise Requirements

The SBA 504 eligibility requirements for a franchisee are the same as those for any other small business owner:

  • You must be a for-profit business operating within the United States
  • Your business must have a net worth of less than $15 million
  • You must have a net income of less than $5 million after federal taxes for the last two years

You must also fill out the required forms that will help support your ability to repay the loan, your expertise in your field, and your moral character.

As a franchisee, you will have just a few additional requirements. These include:

  • No history of corporate bankruptcy
  • Management experience within the industry associated with your franchise
  • Preferably, the franchise must have been in operation for at least two years (the corporate brand, not your location)

How Can Franchises Use the 504 Loan?

Again, the 504 loan can be used to finance any and all fixed assets for your franchise. Let’s use a fast food example. You might use funds from your 504 loan for:

  • Kitchen equipment, including fryers, prep stations, and a walk-in freezer
  • Dining area updates, such as new tables, chairs, trash bins, and soda fountains
  • Energy-efficient upgrades, like eco toilets, solar panels, and energy rated heating and AC equipment
  • Enhanced customer experience, such as adding a drive through or additional parking spaces

Colorado Franchise Opportunities

Topfranchise.com reported on the best franchise opportunities in Colorado as of 2/2023. Of the ones listed, the following are also found in the SBA Franchise Directory:

  • Kiddie Academy (learn more about funding a daycare center with the 504 loan here)
  • California Tortilla
  • Oxi Fresh Carpet Cleaning
  • Blaze Pizza
  • Scooter’s Coffee
  • Sola Salon Studios
  • Zips Dry Cleaners
  • Handyman Connection
  • Fastsigns International, Inc. 

Initial investments for these listed franchises range from between $40,000 to around $1 million, with the majority falling around the $400,000 mark. If you are looking for loan options to finance the acquisition of these or other Colorado franchises, please contact the professionals at CEDCO.org. As a licensed CDC, we have been in business for 30 years helping Colorado entrepreneurs achieve their dreams. Call or go online today to get started. 

franchise represented with wooden building blocks with cartoon diner in red
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