Quick Facts About Franchise SBA Loan Program Approval - Loans do not come directly from the SBA. - SBA approval is not an endorsement of a franchise brand. - SBA approval does not ensure someone seeking a loan for a franchise on the directory will be approved. - SBA approval refers to steps franchisors have taken to make the loan program process with the Small Business Administration as short as possible for their (potential) franchisees. - SBA approval is a shortcut for lenders. Lenders can look up a franchise’s status on the Franchise Directory instead of reviewing brand documentation for affiliation or eligibility for certain SBA loan programs. - The two types of SBA loan programs most often used for franchise financing are the 7(a) Loan Program and the 504 Loan Program. |
While searching for financing options for your franchise, you will likely come across franchises that say they are part of the SBA Franchise Directory and are “SBA-approved” or something to that effect.
One of the most popular options in obtaining financing for a franchise is to apply for a loan through the U.S. Small Business Administration (SBA). With maximum loan amounts of $5 million or $5.5 million depending on the loan program, SBA-backed loans are a common form of financing for franchisees. Overall, approximately 10% of all SBA loans are to franchisees.
What is the SBA Franchise Directory?
The SBA Franchise Directory is a list of all the franchise brands eligible for financial assistance from the U.S. Small Business Association.
To be eligible, a brand’s business model must meet the Federal Trade Commission (FTC) definition of a franchise. Additionally, there are brands in the directory that appear to be franchises but do not meet all the aspects of the FTC definition. These brands operate under a license, jobber, dealer or similar model that the SBA has determined also merits inclusion.
Important Note: A franchise being presented in the Franchise Directory is not an endorsement of that brand or an indication of earning potential.
What is SBA Approval for Franchises?
Directly above is an example of a SBA-approved designation or notice of SBA Franchise Directory participation from a franchisor in its Franchise Disclosure Document. Most often, the declaration will made in Item 10: Financing. Sometimes it is made in Item 5: Initial Fees.
SBA approval refers to steps franchisors have taken to make the loan process as short as possible for their franchisees who need financial help to open their franchise.
During the loan application process, lenders must vet, or examine, the person they’re giving their money to—and the business system they want to run. In a franchise situation, it means vetting the franchisee and franchise system itself.
Franchises that have received SBA approval are declaring that they’ve completed a formal process with the SBA, pre-vetting its system for future loan applications. As a result, the SBA loan process is streamlined for the franchisee.
To emphasize, the loan process is streamlined—not entirely avoided. You as the loan applicant still have to prove that you are a good candidate for the loan, even if the franchisor has already approved you for its franchise system.
Small Business Administration (SBA) Approved Franchises
Home Helpers® Home Care
Be In the Business of Care. Join our leading in-home care franchise that's both rewarding and meaningful. Fulfill your passion with us today.
Visiting Angels Living Assistance Services
Join "America's Choice In Homecare®", ranked #1 of all senior care franchises.
ClaimTek Systems
Start your own business in medical billing & practice management. You'll never look back!
The SBA Doesn’t Loan Money
To clear up another big misconception out there: The SBA doesn’t loan money directly. The SBA provides “partial guarantees for loans through banks that participate in their programs,” says advisor and industry expert Joel Libava.
SBA backing of a loan is attractive to lenders because it means they are getting a guarantee on the money from the government, which is helpful to them—even if the guarantee is only a partial one.
It can be thought of in a similar way to TSA Pre-check at an airport. Travelers with TSA Pre-check still have to go through security. However, because they’ve already registered with the proper authorities they don’t have to spend as much time going through the security line as travelers who haven’t gone through the process.
Kinds of SBA Loans for Franchises
The most common SBA loan program for franchisees is the 7(a) loan program. The 7(a) loan program is the SBA’s primary loan program for small businesses. To qualify, you must meet the checklist of items, which includes:
- Have an eligible type of business.
- Be an operating business.
- Operate for profit.
- Be located in the United States.
- Be small as determined by the SBA size requirements.
- Not be able to obtain the desired credit on “reasonable terms” from non-Federal, non-State, and non-local government sources.
- Be creditworthy and demonstrate a reasonable ability to repay the loan.
“The checklist looks intimidating,” Libava concedes. But “if you need help gathering information or completing forms, ask a CPA familiar with small business loans or one of the franchisees you talked with during your due diligence, for help.”
Another type of SBA loan commonly used by franchisees is the 504/CDC loan program.
The 504/CDC loan is for major fixed assets, such as machinery and equipment. It can also be used for purchasing real estate and remodeling buildings. “A restaurant franchise owner, for example, may use a 504 loan to purchase commercial kitchen equipment,” according to Lending Tree.
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SBA-backed loans are only one way to finance a franchise. If you want more information on financing a franchise in general, check out our Cost to Start a Franchise and Financing Options report.