Securing a loan from the Small Business Association (SBA) to buy into a franchise can help you start your own business under a trusted brand. For many aspiring entrepreneurs, an SBA loan for a franchise is a smart way to access capital with favorable terms. But what are the key steps to navigate the process?
In this article, we’ll break down how to get a franchise loan, outlining the benefits and essential steps. This guide will help you take the first steps toward successful franchise ownership—from understanding the application process to leveraging SBA-backed funding.
What is a franchise business?
A franchise is a business model where an individual or group (the franchisee) buys the rights to operate a location of an established company (the franchisor). In exchange for an upfront fee and ongoing royalties, franchisees gain access to the company’s brand, marketing resources, and business plan. This model reduces much of the uncertainty that comes with starting a new business but also requires franchisees to meet specific operational standards set by the franchisor.
What is an SBA franchise loan?
An SBA loan for a franchise is a government-backed loan designed to reduce the risk for lenders, making it easier for franchisees to secure funding.
“The SBA loan allows you to borrow a higher amount with favorable terms,” says David Greiner, an attorney who has helped many clients obtain SBA loans. “However, the application requires significant documentation and has a short repayment period.”
The repayment period for an SBA loan depends on the loan type, ranging from 10 years for working capital to 25 years for real estate or equipment, demanding effective cash flow management.
It’s important to note that the SBA doesn’t lend directly to businesses—they partner with approved lenders to provide these loans. Because the government guarantees a portion of the loan, SBA loans typically come with lower interest rates and more flexible terms than traditional loans, making them an attractive option for entrepreneurs seeking to finance a loan franchise business.
The benefits of an SBA loan
“Financing a franchise can be complex, but an SBA loan offers good rates if you do your due diligence,” Greiner says. SBA loans provide several benefits, including lower interest rates, longer repayment terms, and more flexible requirements compared to traditional loans.
“My experience helping clients through the process shows that with hard work and persistence, you can achieve your goal of franchise ownership,” Greiner says.
Additionally, SBA loans are backed by the government, making them more accessible to businesses with limited credit history.
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SBA franchise loan options
Three common loan options are the 7(a) Loan Program, the 504 Loan Program, and the SBA Microloan Program, each tailored to different financing needs:
- 7(a) Loan Program: The most popular option, providing up to $5 million, is ideal for general franchise needs like purchasing a franchise, working capital, and acquiring equipment.
- 504 Loan Program: Offering up to $5.5 million, the loan focused on larger, fixed-asset purchases such as real estate or machinery for your franchise.
- SBA Microloan Program: This loan provides up to $50,000, making it useful for smaller franchises or initial start-up costs.
How to get an SBA loan for a franchise
Securing an SBA loan for a franchise can be a straightforward process if you're well-prepared and understand the requirements. The SBA has specific guidelines to help reduce the risk for lenders, but meeting these standards ensures that your franchise investment is sound.
“To qualify, you need strong credit, industry experience, and a solid business plan,” says Jason Best, an entrepreneur with over 20 years of experience who has obtained SBA loans in the past. “Research the franchise and costs, determine your funding needs, check your credit, and prepare detailed financials. Apply to multiple lenders and negotiate the best terms.”
Here are six steps to follow to help you get your franchise business loan approved and funded:
- Check eligibility: The franchise must be listed on the SBA's Franchise Directory to ensure it meets the SBA’s standards.
- Prepare a strong business plan: Create a detailed plan that highlights your franchise’s potential, includes financial projections, and explains exactly how the loan will be used. (Here's how to write a business plan.)
- Find an SBA-approved lender: Choose a lender experienced with SBA loans and franchise financing to help guide you through the process.
- Complete the application: Submit all required documents, including personal and business financial statements, your franchise agreement, and a comprehensive business plan.
- Negotiate terms: Once the lender gives initial approval, discuss interest rates, repayment terms, and any additional conditions to secure the best deal possible.
- Await approval: The SBA and the lender will review your application. If everything is in order, you’ll receive the funds necessary to begin your franchise journey.
Alternative ways to finance a franchise
If an SBA loan for franchise isn’t right for you, there are other options available:
- Traditional bank loans: These often require stronger credit and higher down payments.
- Franchisor financing: Some franchisors offer in-house financing or partner with lenders.
- Crowdfunding or investors: Entrepreneurs may raise capital through equity crowdfunding or investors willing to take a stake in the business.
- Personal loans or savings: Depending on your situation, personal financing can be an option to avoid debt or high interest rates.
- Home Equity Lines of Credit (HELOC): If you have significant equity in your home, you may be able to use a HELOC to finance your franchise, offering potentially lower interest rates than other loan options. However, leveraging home equity can come with risks, because your home serves as collateral.
Read this next—it might also spark some ideas: How to Get a Startup Business Loan With No Money?
FAQs
What credit score is required for SBA?
Lenders typically require a minimum credit score of 690, though a score above 700 significantly improves your chances. While a lower score may not automatically disqualify you, it might mean higher interest rates or stricter terms.
What is the easiest SBA loan to get?
The SBA Microloan is often seen as the easiest to qualify for due to its smaller loan amounts and flexible requirements. However, “the 7(a) loan is the most common because it’s accessible to those with good credit and experience,” Greiner says. While the Microloan is simpler to obtain for small businesses, the 7(a) loan remains a popular option for franchisees who meet the credit and experience criteria, offering more substantial funding for business needs.
How long does it take to get an SBA loan?
The SBA loan approval process typically takes 30 to 90 days, but there are no guarantees. The timeline depends on factors like the completeness of your application, loan size, and the lender’s internal processes. You can speed things up by making sure all documents are accurate and submitted on time.
Can I use an SBA loan to buy any franchise?
No, not all franchises qualify. To use an SBA loan to buy an existing business or franchise, the franchise must be listed on the SBA’s Franchise Directory, ensuring it meets the SBA’s eligibility criteria. You can check the directory on the SBA’s website or ask your franchisor if they’re approved.