The Ultimate Guide To SBA Franchise Loans

The SBA Standard 7(a) loan is one of the most popular and versatile SBA loan programs. Loans up to $5 million are available and can be used for nearly any business purpose, including:

• Supplies
• Inventory
• Working capital
• Business acquisition
• Refinancing high-interest debt
• Commercial real estate

The SBA has set repayment terms that keep the Standard SBA 7(a) loan extremely competitive. Maximum repayment terms are the prime rate plus a markup. This markup is determined by the borrowing amount and the length of the loan.

Repayment terms are up to 25 years for real estate purchases and up to 10 years for all other purposes.

Another loan that falls under the 7(a) umbrella is the SBA Express loan. This loan is very similar to the Standard 7(a) loan with a few notable differences.

The SBA Express loan program offers a maximum of $500,000. It can be used for nearly any business, just like the Standard 7(a) loan. Interest rates are set by the SBA and are slightly higher than Standard 7(a) loans but are still competitive. Maximum rates are the prime rate plus a maximum 6.5% markup.

What makes this loan stand out is that an approval decision is guaranteed within 36 hours, compared to 5-10+ business days with the Standard 7(a) loan. While an approval decision is made quickly, processing, underwriting, and funding may take 30-90+ days for the Express loan.

SBA 504/CDC Loans provide up to $5 million for commercial real estate purchases, although some projects may be eligible for $5.5 million. Funds can be used for:

• New construction
• Improvements to existing buildings
• Land
• Long-term fixed equipment and machinery 

These loans work a little differently than other SBA programs because two lenders are involved. Here’s how funding works:

• A Certified Development Company (CDC) provides up to 40% of project costs
• A third-party lender (such as a bank or credit union) provides up to 50% of project costs
• The borrower pays at least 10% of project costs

SBA 504 loans are fixed-rate loans. Interest rates are based on U.S. Treasury rates. Repayment terms up to 25 years are available.

Previously, the SBA made it easy to determine if your franchise was eligible with its Franchise Directory, a list that was used by lenders to determine the eligibility of the franchise. However, as of May 11, 2023, the SBA will no longer continue to maintain or support the Franchise Directory.

Instead, this means that it will be up to the lender to vet a franchise. Your lender can help you determine if your franchise is eligible. Hundreds of franchises have been listed in the Franchise Directory in the past, so if you operate a well-known franchise and meet all other SBA loan requirements, the odds are good that your business may qualify.

Once you’ve determined that your franchise is eligible for a franchise loan, you — the franchisee — will also need to meet certain requirements set by the lender and the SBA.

The SBA has basic guidelines that all borrowers must meet. To receive an SBA loan, you must:

• Operate a for-profit business
• Engage in business or plan to engage in business in the United States or a U.S. territory
• Meet the size standards of a small business as defined by the SBA
• Have had to exhaust all other means of funding before seeking an SBA loan
• Show that you have the means to repay the loan
• Have a business in an eligible industry

The ideal borrower has an acceptable business history with a franchise of at least two years. Lenders want to know that your franchise will be a success, so the more successful locations your business already has, the better. Popular franchise types include retail, fitness, daycare, food service, and hospitality.

There are no specific personal credit requirements for SBA franchise loans. However, it is mandatory that you have a strong credit score with a solid credit history. Generally, it is recommended to have a personal credit score of at least 680 to qualify for an SBA loan.

You will need to explain negative items like missed payments or collections to your lender. Certain negative items, including recent bankruptcies, foreclosures, and defaulted government loans, will make you ineligible for an SBA loan.

For most SBA loans, collateral is required in the form of business assets. In some cases, personal real estate may be used as collateral.

All owners with at least a 20% stake in the business must also sign a personal guarantee. This makes borrowers personally liable for the debt if they default on the loan.