Financing a Franchise: SBA Loans

Earlier in the week, we started this series of posts on franchise finance by discussing one option for those entrepreneurs seeking loans: the conventional business loan. As we discussed, these loans can be hard to come by these days given the increased scrutiny that all banks must use in approving loans. So what do you do if you still need a bank loan?

The answer lies in a governmental program operated by the Small Business Administration called, conveniently, an SBA Loan. SBA loans are partially guaranteed by the government, making them less risky to lenders. The most common SBA loan for franchisees is known as the 7(a), which is issued by a bank or other qualified lender, and partly guaranteed against default by the government. Because of that backing, such loans are seen as less risky to banks and are more easily approved.

Most SBA loans have five- to six-year maturities but can go up to ten years. Real-estate-specific loans can run for 20 years or more. About 10% of all SBA loans go to franchisees, with the size running between $250,000 and $500,000, and maximum of $2 million. As is the case with conventional business loans, borrowers must be creditworthy and typically must contribute some equity, usually in the range of 20-30%.

Many SBA loans carry fluctuating interest rates. While the actual rate is negotiated between the bank and the borrower, it’s subject to SBA maximums, which are tied to the prime rate. While a low rate may be attractive initially, make sure you can generate enough business to cover the payments if the rate rises.

Another subset of the government lending programs involves the Department of Veterans Affairs. The program, called Patriot Express because of its relatively fast approval time, makes loans up to $500,000 to active-duty military preparing to transition to civilian life, as well as to spouses and survivors of veterans. The loans come with the SBA’s lowest rates. This combined with D.P. Dough’s reduced franchise fees for active and retired military service members makes these loans especially attractive if you’ve served our country and are ready to go into business for yourself.

Next up we’ll discuss some alternative business financing methods, including lending money to yourself through a 401K Rollover. And, as always, if you’re interested in speaking with a member of the D.P. Dough Franchising executive team about what financing options are best for you or if you’re ready to open you’re own D.P. Dough, contact us today! Fill the out the information request form and we’ll be in touch!

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