Are you considering investing in a franchise and curious about how to secure funding through the Small Business Administration (SBA)? This comprehensive guide will walk you through key factors to consider and steps to take to ensure your franchise is eligible for SBA financing.
Evaluate Franchise Units
One of the first things you should evaluate when considering a franchise is the number of units that are currently open. This can significantly impact the ease of securing SBA financing. Franchises with more units are often more appealing to lenders because they indicate a proven business model. Conversely, if a franchise has very few units, it may not be listed in the SBA directory of approved franchises, making financing more challenging.
Consult with SBA Loan Specialists
Engaging with a loan consultant who specializes in SBA financing can be a game-changer. The first document you should request is the Franchise Disclosure Document (FDD). The FDD will provide comprehensive information about the franchise, including the number of existing units, pending units, and other critical operational details. This document is essential for assessing the franchise’s viability.
Bank Approval Process
After obtaining the FDD, the next step is to check if the franchise has been previously approved by banks for SBA loans. Even if a franchise is not listed in the SBA directory, it can still be approved by individual banks. Reach out to a bank representative, preferably someone in the head of processing, to inquire about the franchise's approval status. If the franchise has been approved in the past, it significantly increases your chances of securing a loan.
Financing Newer Franchises
Newer franchise concepts can be particularly challenging to finance due to their limited track record. Banks often impose limits on the maximum loan proceeds they are willing to offer for newer franchises. Additionally, they might restrict the number of loans they approve for such franchises each year until a solid track record is established. If you’re considering a newer franchise, it’s vital to understand these potential limitations and plan accordingly.
Proactive Financing Strategy
One of the biggest pitfalls for new business owners is undercapitalization. Before committing to a franchise, ensure you have a robust financing plan in place. Proactively securing SBA financing and investing in a franchise that is known to be financeable can set you up for success. Remember, paying the franchise fee is just the beginning. You’ll need sufficient working capital to support your business operations.