How to Secure an SBA Loan for Franchise

How to Secure an SBA Loan for Franchise

Are you dreaming of starting your own business? A better question, are you planning to own a business by joining a franchise? Any savvy businessman would tell you that getting a franchise is one of the easiest ways to start a business. One of the best advantages of joining a franchise is that you will get a proven process and system that has yielded successful results and positive revenues for others. Like any worthwhile business, getting a successful franchise will need a capital investment. If you don’t have the necessary money saved up, you can apply for financing or an SBA loan for franchise, for example. Let’s take a closer look at how you can get an SBA (Small Business Administration) loan.

What Is an SBA Loan for Franchise?

SBA loans are backed by the Small Business Administration, an U.S. government body. The government partially guarantees these loans up to 85% of the total loan amount. Interest rates range from 5.8% to 8.5%. To be clear, SBA does not provide the money for the loan. The money is provided by private entities like banks and other financial institutions (e.g., Well Fargo Bank and Chase Bank) which are SBA approved as lenders.

The SBA guarantees the payment regardless of the loaner’s actions, thus removing the risk that the lenders will lose money on unpaid loans. SBA loans also have lower down payments and longer repayment terms compared to conventional loans. These loan terms make it a godsend for new or small business owners.

The SBA has many loan programs that cater to many financial needs. But the best SBA loan for franchise businesses is the 7(a) loan program. The 7(a) loan is primarily used to start a new business or to expand an existing one.

SBA 7(a) Loan:

  • Size can be up to $5 million and can be used as capital for small businesses or buying real estate.
  • Loan term can be up to 10 years for business capital and 25 years for real estate.
  • Interest rate is between 7.25% and 9.75%.

How to Apply for an SBA Loan?

1. Choose Your Loan Program

Since this is a guide for getting an SBA loan for franchise businesses, you should choose the SBA 7(a) loan. To qualify for an SBA loan:

  • Your business must operate in the United States, or within a U.S. territory.
  • You, the business owner, must not be on parole or have a nasty criminal record. Don’t worry, unpaid parking tickets are not included.
  • The business is not a non-profit organization.
  • Lastly, you must exhaust all options to finance your business before getting a 7(a) loan. If you have extra assets which you can liquidate, then you might not be eligible for this loan.

2. Prepare Your Business Plan and Financial Documents

If you are getting a franchise, the franchiser should be able to provide you with assistance in preparing the business plan. The business plan should also have a positive business case, which is very important to show the lender that their money will be put into good use.  The business plan should be very professional with narrative on how the business will make money. Use financial statements, charts, and spreadsheets. Numbers may be boring to us, but accountants love them. Check SBA’s document requirements and start preparing.

3. Find a Lender

Choose a lender based on your preferences. Maybe you want to transact with a bank that’s near your business location. You can choose from these SBA accredited lenders. There are also lender aggregators and finders like SmartBiz, which can help you connect with a lender. Most lenders offer an online application option.

4. Submit Your Loan Application

This is where you gather all the documents the lender requires and submit your loan application. Gather all those documents you prepared in step 2. Check with your chosen lender if they have additional required documents.

5. Wait for Lender’s Decision

After you have given all the required documents, the lender will review your loan application, perform credit analysis, do some background checks, and review your business case. If you will use the SBA loan for franchise purchase, then the stability of the franchise company will play an important part. Luckily, DetailXPerts is a pioneer in the eco clean business and has supported many successful franchisees. This may take anywhere from a few weeks to a month.

6. Loan Approval

The lender approves your loan! However, you are a few more steps away from securing an SBA loan for franchise set up. The lender prepares the SBA loan authorization. This is an agreement between the SBA and the lender pertaining to how the SBA will guarantee the loan. The lender completes loan underwriting and does some more paperwork. Loan underwriting will determine if a lender’s loan is an acceptable risk.  The lender’s underwriters will assess your ability to repay the SBA loan.

7. Loan Closing

Getting your loan money requires a successful loan closing. This is the last step in the loan process. It is where all the parties in the loan (lender and lendee) sign the legal documents and agreements. This is another round of document review and possibly preparation of new documents. Review the SBA’s pre-close document checklist or request a checklist from your lender.

Loan closing is the last opportunity for the lender to check for any problems, such as eligibility or credit issues before they release the loan.

Lastly, be prompt when responding to your lender’s requests for additional information and documents. Processing and getting an SBA loan for franchise investments is a lengthy process. Keep your wits about you, pay attention to the process and you should be rewarded with your SBA loan – and a strapping new business.

DetailXPerts is an innovative, mobile, and eco-friendly auto detailing business available for potential franchisees. Let us help you secure the proper financing. Contact us if you need more help in franchise financing or require more information on our franchise opportunities.

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