The US Small Business Administration (SBA) is a government agency that carries the mandate of providing financial support to entrepreneurs. It doesn’t lend money directly. Instead, it guarantees a part of the loans made to small firms by certain banks, credit unions, and non-bank lenders with which it has a tie-up.
SBA loans are available for establishing a new franchise as well as for acquiring an existing unit. As the federal government guarantees these loans, lenders are willing to advance funds at relatively low rates of interest. In fact, SBA loans cannot be made at rates that exceed a certain markup over the prime rate.
SBA’s flagship product – the 7(a) loan program
The 7(a) loan can be used for a wide variety of purposes for your franchise. These include long-term and short-term working capital, purchase of inventory, and the financing of receivables. Proceeds from the SBA 7(a) loan can also be used for buying equipment, machinery, furniture, and different types of supplies.
You can even buy or construct a building for your business or pay your franchise fees with this type of loan.
7(a) loans are available for terms up to seven years for working capital, 10 years for equipment, and 25 years for real estate. The interest rate varies with the term of the loan and the current prime rate. At present, 7(a) loans are available at 6.5% to 9% per year.
Real estate and equipment loans – CDC/504
The CDC/504 loan program is for helping small businesses purchase major fixed assets such as equipment or real estate. It can also be used for modernization and renovation of your franchise. You cannot utilize CDC/504 money for working capital. The maximum term for this type of loan is 10 years for machinery or equipment and 20 years for real estate.
Borrowers can get a tremendous rate advantage if they are eligible for this loan. Currently, CDC/504 loans are available at interest rates that are less than 5% per year.
7(a) or CDC/504 – which should you opt for?
It is possible to get confused between the different programs that SBA offers. Remember that the 7(a) loan is a flexible product. You can buy a fixed asset, purchase real estate, or use the money for your working capital needs. Your 7(a) loan can also be used for a combination of your different business requirements.
The CDC/504 program is more suited for construction, renovation, or purchase of buildings or heavy machinery.
Lender Match – an online tool to get an SBA loan
Getting approved for an SBA loan for your franchise can be difficult. Although each proposal is considered on its independent merit, there are some broad guidelines that will help you understand whether you stand a chance of getting approved.
- You should have a high credit score. A FICO score of 680 or more for the primary business owner will help your proposal to be viewed favorably.
- It is important that you provide collateral. SBA generally does not offer collateral-free loans.
- Startups will find getting approval difficult. While SBA loans are available for new companies, most successful loan applications are from businesses that are at least two years old.
There are hundreds of approved SBA lenders. Deciding which one to approach to finance your franchise can be confusing. To address this issue, SBA has developed a “Lender Match” program. This is an online tool that a prospective borrower can use to find a bank or a credit union that would be interested in extending finance.
All that you have to do is provide a few details about your franchise business on the SBA’s website. Subsequently, you will receive an email with the contact information of potential lenders. You can compare their rates and fees and select the one that best meets your needs.
Getting approved for an SBA loan
Meeting the strict credit appraisal criteria of the SBA can be difficult. But if you do get approval, you will have access to long-term capital at a low rate of interest. SBA loans are among the cheapest in the market.
According to a report in the Wall Street Journal, about 10% of SBA loans are made to franchisees. Most of the loan amounts range from $250,000 to $500,000 with the maximum being $2 million.
How can you increase the chances of getting approval? Remember that there are hundreds of SBA lenders out there. However, there are certain lenders who qualify under SBA’s “Preferred Lender Program.” These financial institutions do not need prior approval from SBA for your loan application. They are authorized to take an independent decision.
Approaching a Preferred Lender will allow you to get a credit decision faster. You will also have access to the expert advice that this lender can provide you with.