SBA loans are an excellent option for single unit and start-up franchise operators
By: Mike Pierson, Executive Vice President – National Sales Manager at Gulf Coast Small Business Lending
The Small Business Administration (SBA) has been a staple for decades in assisting borrowers as they obtain financing for start-up franchise businesses, expansion of multi-unit franchise operators, and acquisition of franchise businesses. The SBA allows lenders to extend credit to borrowers that are otherwise unable to obtain financing elsewhere by providing a guarantee to the lender in case of loss due to loan default which, in turn, makes lenders more likely to offer financing for SBA eligible projects. This article will provide some useful information if you are considering utilizing an SBA loan to finance your franchise business. For the purposes of this article, an “SBA loan” refers to a loan provided using the SBA 7(a) loan program.
For over 20 years, I’ve had the honor of providing financing for over 200 franchisees in an array of franchise concepts across many different industries.
The SBA loan product offers several benefits to franchisees, including:
- Longer repayment terms than typically available with conventional loans – up to 10 years. Note that SBA loans are fully amortizing which means there will be no balloon payment due in 5 years;
- Flexible uses of SBA loan proceeds covering a variety of project costs;
- SBA loan amounts up to $5,000,000;
- Low down payments (this refers to the borrower’s required injection of personal funds);
- Opportunity to provide operating capital for the franchise business;
- Affordable and competitive interest rates based off of the Prime lending rate;
- Attractive terms that allow borrowers to retain much of their personal liquidity.
In my experience, I have found that the primary key to success in securing an SBA loan to finance your franchise business is working with an experienced SBA lender. I always recommend that prospective borrowers interview SBA lenders and ask these key questions (also, check out an article written by our top producing business development officer about How to Choose the Right SBA Lender for Your Project for additional tips):
- How long have you been an active and exclusive SBA lender?
- How long has your bank been providing SBA Loans?
- How long have you been a loan officer of your bank?
- Is your bank a Preferred Lending Partner of the SBA?
- If you plan to open multiple locations, be certain to ask the lender how quickly they will be willing to finance a second location.
The SBA sets guidelines for all participating lenders and for this reason, most lenders will require a 20% cash injection (also known as “down payment”, funded from your personal cash reserves) for the first franchise location. Many lenders will require less injection for the second and third locations. Prudent lenders will also want the borrower to maintain post-closing liquidity after the injection so that they aren’t immediately “strapped for cash” as soon as they’ve closed on their SBA loan. Understandably, not having cash reserves to meet personal living expenses would be an added stress that would pile onto the pressure of opening (or buying) your franchise business.
For a successful application, it’s important that borrowers have prepared a thorough Business Plan and Two Year Pro Forma financial projections, including month-to-month for the first year with detailed assumptions explaining how they arrived at the figures in the projections. Borrowers should not rely on the franchisor’s numbers when creating projections. Instead, they should conduct their own research and confirm that they thoroughly understand all the details of the financial undertaking they are considering. I always recommend that they interview other franchisees in similar markets to get an accurate reflection of the operation of the franchise business. You might be surprised at what you learn!
It is also very important to have a location selected for your franchise business prior to applying for your SBA loan. The more information that the borrower provides to the lender (including demographics, traffic patterns, competition, and surrounding businesses), the quicker the underwriting process will be! Once you have selected a location, it is recommended that you NOT execute a lease until you negotiate the SBA’s required landlord waiver (don’t worry, your SBA lender should explain this to you). The next step after securing your location is to begin gathering construction estimates, furniture and equipment quotes, and inventory needs. You will need all of this information when you prepare your financial projections and, obviously, these figures will ultimately determine the amount of SBA loan you will need.
One other tip is that it is always helpful when a borrower details the reasoning behind their selection of a specific franchise. Whether that’s because of brand recognition, regional exposure, or personnel experience it helps us to better understand the “big picture”. Not to mention, the more a borrower can opine about the franchise they have selected the more comfortable an SBA lender will become with the project and contemplated SBA loan.
You should also know that SBA lenders always analyze the franchise as well as the borrower when considering your SBA loan request. Our review will include such items as: the number of franchise units, the system wide failure rate, the financial health of the franchisor, the regional/national footprint of the franchisor, and the name recognition of the brand. In addition, we will review the borrower’s management experience, personal credit management, financial strengths, and outside income.
SBA lenders like Gulf Coast Small Business Lending support borrowers throughout the entire SBA loan process, including application, underwriting, loan closing, construction, pre-opening, and post-opening of the business. We have worked with over 70 different franchise concepts and are always looking to expand into new systems with successful operations. If you have questions or simply wish to discuss the possibility of financing your franchise business, I (and my experienced sales team) am always available to speak with prospective franchisors and franchisees. After all, SBA lending is our focus, and we love helping small business owners achieve their entrepreneurial dreams!
You can also find more information about our loans for franchise businesses and restaurants (both franchise and independent) here: https://gulfcoastsba.com/sba-loans/ and https://gulfcoastsba.com/restaurant-franchise/.
Mike Pierson has been an SBA lender for over 25 years, joining the Gulf Coast Small Business Lending team in 2014. In 2019, Mike was promoted to the role of Regional Sales Manager and in 2022 he was named Executive Vice President – National Sales Manager. As a producing sales manager, Mike enjoys working with his BDO team, borrowers, and referral sources nationwide and has specific expertise in structuring SBA loans for business acquisitions, franchise lending, and construction. Mike holds a Master’s Degree in Sports Management and Bachelor’s Degrees in Finance and Marketing from Florida State University. He is an active participant in youth sports, coaching both soccer and basketball. Mike is also an avid golfer and enjoys fishing with his family.
Products and services offered by Gulf Coast Small Business Lending, a division of Gulf Coast Bank & Trust Co. Nothing herein shall be construed as a commitment to lend. All loans are subject to credit and collateral approval. Additional terms, restrictions and limitations may apply. Loans are only available to U.S. citizens and residents. Member FDIC – Equal Housing Lender.