5 Reasons SBA Loans Make Financial Sense for Small Franchise Businesses

 

The US Small Business Administration is a federal government agency that guarantees part of a the Small Business Administration loan (SBA) which can provide much-needed credit to franchisees. The government does not pay the loan directly to franchise businesses but sets guidelines for the financial institution who are administering the payment. Sites such as Intuit Loan Finder and Biz2Credit can help franchise businesses find the best SBA loan to meet their financial needs, providing them with the capital needed to kick start a new business venture.

 

 

As the government guarantees part of the SBA loan, you will have a greater chance of being accepted in comparison to a regular business loan. When you make your application for a SBA loan, you will need to prepare a financial statement, copies of your personal tax returns from the last three years and information on how you intend to finance your down payment. Lenders favor businesses that have already proved themselves financially and can provide them with evidence of consistent turnover. 

 

Franchise business ventures with few locations are also less attractive to potential lenders because they cannot easily prove that the franchise will succeed in different areas of the country, especially in the current economic climate. Unsecured bank loans can be difficult to obtain and securing the loan with your mortgage can increase your chances of being accepted for credit. Most bank loans to franchisees are awarded when the borrower already has a good credit history with the financial institution or is a well-respected figure in the local community.

 

 

Usually down payments for the SBA loan are no more than 20% of the total project cost, helping to increase the amount of spending money that you might want to pour into other areas of the business and increase the rate of return on the investment. As regular business loans often have down payments of 30% or more, a SBA-guaranteed loan can dramatically reduce the amount of the money you need to put down in order to secure the loan. The SBA loan also doesn’t contain “payable on demand” clauses which allows the lender to require full payment in the event that need the money to meet requirements for liquidity. However, all small businesses must meet certain criteria before being accepted for an SBA loan including the evaluation of the financial standing of the business. SBA loans cannot be made to a franchisee if the borrower has access to other finance that offers them a loan with reasonable repayment conditions. Intuit Loan Finder can provide further financial advice if this is the case.

 

 

Interest rates vary on Small Business Administration loans, depending on the financial institution. We can work out the most affordable repayment plans and provide assistance when you make your application. We can help you negotiate the interest rate level between yourself and the bank. Although agreeing on a low rate might seem financially shrewd at first, the interest rate could rise, subject to SBA maximums set by the government. You will need to prove you will generate enough business revenue to cover the payments if the interest rate increases. 

 

Thoughts from Money.co.uk are that, you must consider how long you need the loan to cover you for as the longer the loan, the more interest you will have to pay on it. Accepting the shortest term possible increases your chance of being able to repay the amount. SBA loans also offer lower interest rates than internal financing programs offered by the franchise company. Many franchisers offer to waive or defer a portion of the franchise setup cost which may appear attractive to the borrower but interest rates will be much higher in the long term in comparison to the SBA loan.

 

 

Consider a Small Business Administration loan if you have yet to establish a good financial relationship with your bank. The government will guarantee part of the SBA loan, also known as the 7(a), if the debtor defaults and are therefore less risky for the creditor. Whilst regular business loans can last for 20 years or more, SBA loans can run for five or six, helping to provide short term capital for your franchise business. Statistics reveal that about 10% of all SBA loans are awarded to franchisees, with a maximum amount of $2 million that can be borrowed. 

 

Franchise entry fees can be expensive so the majority of a loan will spent on start-up costs, as well as improvements to the business and working capital. Like with regular business loans, SBA loans are often allocated to individuals who have a good credit rating and haven’t defaulted on any previous credit agreements. An SBA loan is also expected to be repaid from the cash flow of the business.

 

 

Individuals with a poor credit history may be offered a higher annual repayment rate on the SBA loan. We liaise with several companies that specialize in providing loans for individuals with a poor credit history in order for you receive the most cost effective loan for your circumstances. If your financial circumstances change in the future, you can could pay the loan off early with no prepayment penalty. SBA-guaranteed loans also do not have early balloon payments so you won’t have to renew the loan in a few years like you would need to do with a regular business loan. 

 

The Patriot Express loan scheme is another government-supported lending program which offers loans up to $500,000 to members of the US military on active duty who are preparing to return to civilian life. Working with the Department of Veterans Affairs, the Patriot Express loan has a faster approval time than most other forms of credit and a lender may be able to participate in the scheme if it currently runs the SBA scheme.