It’s no secret – buying a franchise is expensive and requires a large up-front investment. There’s a wide range in cost for franchises, from tens of thousands to more than a million dollars, and it’s unlikely that potential franchisees have that kind of cash lying around.
Luckily, there are some options when it comes to keeping your start-up costs low. The most obvious option is looking into franchises that have a lower cost. It’s also not uncommon to use money from a retirement account, borrow money from family members, or find a business partner. And another option, of course, is to take out a loan.
Read More: 3 Ways to Finance a New Franchise
Borrowing money to start your business may feel daunting, but most people borrow to buy a home or a car. So financing part of your business, which is going to be just as important as your home or vehicle, is a reasonable option.
One of the most common borrowing practices used by franchisees is applying for a loan through the U.S. Small Business Administration (SBA).
The SBA doesn’t actually lend money, but as a government agency, they’re able to guarantee a portion of loans given out by lending institutions, which makes this type of loan less risky than traditional financing.
How it works
The SBA says the following on their loan structures:
SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and microlending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.
More can be learned on their website, which even has a tool that helps you locate a lender offering SBA guaranteed loans.
Of course, like all loans, you’ll have to apply and be found eligible. Lenders will look at your current financial status by examining like current assets, any debt you hold, credit score, as well as making sure that your business plan is sound.
During your franchise research, you may come across franchise that note that they are “SBA Approved”. But that doesn’t automatically mean that you will receive approval for your loan request.
When it comes to franchising, SBA Approval means that the franchisor has gone through the process of having the business model and franchise system evaluated. This means when you apply as a franchisee, the franchise itself will not be as heavily scrutinized.
Franchises that are SBA approved can help make the process of applying for a loan as smooth as possible for applicants.
You don’t need to choose a franchise that has been SBA approved to qualify for an SBA loan (not all franchises are SBA approved). Finding a franchise with a long-standing history and business plan is a great place to start.
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