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3 Small Business Administration Loan Programs To Finance Your Franchise

Franchises are a simple and effortless way to jump right into the business world – to finally be your own boss.

Plus, franchises are probably the easiest businesses to get financed because they usually do not come with a lot of the start-up risk (unknown risk) that banks and other business lenders tend to shy away from. Since most franchises come with strong brand names, proven profitability and cash flow track records and tend to perform well in nearly any location (globally), these business models have the propensity to fly through the loan underwriting process and go from application to funding in no time flat.

In fact, the Small Business Administration (SBA), in hopes of speeding up their funding process and funding more franchise loans, have created a “SBA-approve franchise” list – a list of franchises that the SBA has already vetted through their underwriting process.

According to Jim D, a former moderator for the SBA.gov website;

“SBA-approved franchises are select business opportunities whose agreements have been accepted by the SBA. When it comes to securing an SBA-backed loan, those applying for an approved-franchise have it easier and quicker. Applicants for SBA-approved franchises benefit from a streamlined review process that expedites their loan application. Because the particular franchise is pre-approved, the loan review is less complex and focuses on specific aspects of that brand’s business plan.”

So, if the SBA likes franchises so much, what loan programs do they offer?

3 SBA Loan Programs For Franchises

First things first. The SBA does not directly provide loans to business or franchise owners. Thus, you will still have to take your loan request to a SBA lending bank or financial institution. However, these originations also know that the SBA likes proven franchise businesses and are more than willing to review and process your application.

When seeking a SBA loan for your franchise you should focus your specific financing needs and match them to the SBA’s loan program as follows:

  1. SBA 7(a) Loan Program: This is the SBA’s flagship program designed to fund almost all aspects of a business.

According to the SBA, the 7(a) loan program can be used:

  • To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory
  • Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
  • Revolving funds based on the value of existing inventory and receivables, under special conditions
  • To purchase equipment, machinery, furniture, fixtures, supplies or materials
  • To purchase real estate, including land and buildings
  • To construct a new building or renovate an existing building
  • To establish a new business or assist in the acquisition, operation or expansion of an existing business
  • To refinance existing business debt, under certain conditions

This program has a maximum loan amount of $5 million with the average, in 2012 – the last published figure, being around $337,730.

As most SBA loans come with longer loan terms making monthly payments even more affordable, loan maturities for real estate can go out to 25 years, up to ten years for equipment and up to seven years for working capital.

Now, all SBA loans are assumed to be fully collateralized by either business or personal assets. However, while the SBA expects this, they will not decline a loan based solely on the lack of adequate collateral.

Lastly, know that these loans do require that the borrower provide 20% or more as a down payment or their own equity in the deal. Thus, the SBA will only guarantee 80% of the needed amount.

As you should be able to see, this SBA program can cover almost all franchise financing needs from real estate purchase and development to business equipment to working capital needs. Thus, if that is what you need to buy or grow your franchise, start here.

  1. CDC/504 Loan Program: The 504 loan program, like the 7(a) program, is great for franchises. However, this program is limited to real estate and equipment purchases only.

According to the SBA, the 504 loan program can be used for;

  • The purchase of land, including existing buildings
  • The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
  • The construction of new facilities or modernizing, renovating or converting existing facilities

But, the real benefit with this loan program is that the equity portion or down payment required from the borrower is lower – usually around 10% – thus, requiring less out of pocket expense.

How this program works. This program was designed to help facilitate additional business growth and development within community areas. Thus, when a 504 loan is requested and approved, a local Community Development Corporation (CDC) – the community part of the loan – will fund and guarantee up to 40% of the loan request, a local SBA approved bank will fund 50% of the loan request leaving the remaining 10% from the borrower. Three partners all working for the same goal – the long-term success of your franchise.

This program can provide up to $5 million for businesses that can and will create jobs in the community, up to $5 million for businesses that provide stated public benefit such as energy reduction or alternative fuels as well as rural development businesses, minority, women or veteran businesses, export companies – just to name a few – these are stated goals that are known to have public benefit and as such the SBA wants to fund these companies. And, up to $4 million for small, job creating manufacturing firms.

Lastly, to make these loans and their resulting payments more affordable – ensuing the long-term success of the borrower – the SBA will allow loan terms of 10 and 20 years.

  1. SBA Express Program: The SBA express program is like the little brother of the SBA’s 7(a) loan program with several benefits and restrictions.

First, this program offers a hastened review process. In fact, the SBA guarantees that your express loan application will receive a response in less than 36 hours. But, while you might receive a response, this does not mean you will receive an approval. It just means that you will know that the SBA has receive your application and they will usually ask for additional information from you at that time – but, at least you know it is being worked.

Second, the maximum loan amount under this program is only $350,000. Which is not a huge amount these days but might be enough to get you into the franchise of your dreams – especially when compared to the average loan amount of the full 7(a) program of around $337,730.

Third, the SBA will only guarantee up to 50% of the loan amount – meaning that more of the risk of the loan will fall back onto the bank or lender. Yet, if your deal is strong enough, this 50% guarantee might just be the difference between approval and denial.

Lastly, these loans offers loan terms up to 7 years only and can be used for nearly any business capital need.

What Is A Small Business?

Now, to qualify for a SBA loan, your franchise has to meet the SBA’s small business definition of:

  • Be for-profit.
  • Have up to 500 employees – up to 1,500 for manufacturing.
  • Have under $21 million in annual receipts – less for certain businesses or industries.

Which nearly all individual franchise businesses fit.

Conclusion

Franchising is a great way to jump into the business world with a proven, well known business model. Yet, like almost all businesses on the planet, financing that franchise either to get it started or to grow it is still a hard hurdle to overcome.

Yet, as stated and hopefully shown, franchises do tend to get more favorable approval rates when using government guaranteed funding programs like these SBA loans. And, it is not just that the SBA views these types of businesses in an encouraging light but so do banks and other business lenders – those other partners needed to get your SBA loan approved and funded.

However, just because your chosen franchise is or is not on a SBA-approved list and that your loan request and use of funds meets these criteria, does not mean that you will be automatically approved. The only way to know for sure if you and your franchise will be approved is to apply. And, since you have to apply no matter what option you chose, you might as well apply with a financial organization or business funder that already works with the SBA – it can only double your chances of getting the capital you need to fully realize your franchise dreams.

How to Start a Business and Follow Your Dream

Owning your own business is a goal that many people dream of, but not everyone realizes this dream. In order to make your dream come true you must a plan. This plan will lay out the steps you need to make your business a success. Many small businesses fail for lack of planning and resources. Use these tips to start a business and follow your dream.

Write a Business Plan

A business plan is the first place to start. In your business plan you need to state the nature of your business, a company description, organization and management structure, marketing plans, your target audience, and a budget. Depending on your business you plan may contain more items; each one is different because each business is different and has different goals.

Get Training

The Small Business Association has free training seminars you can attend if this is your first time starting a business. Their courses cover all aspects on how to start a business. If you’ve never had any financial training you may want to consider taking accounting or bookkeeping classes. These classes will give you a deeper understanding about the financial structure of your business and how to keep accurate records.

Location is Important

If you are going to start a business and have a physical storefront you need to give location a lot of thought and research. Scout out locations in your town and talk to other business owners in the area. Ask them about the traffic flow, if the area is safe, and if they would rebuild there again. Enlist the services of a commercial real estate agent. They will help you navigate the complicated process of purchasing commercial property, or find the perfect location for building your storefront.

Research Financing Options

You have several options to explore when you start a business. The Small Business Association offers loans at competitive rates, and they have several types of loans and loan structures set up to help people start a small business. Banks are an obvious choice, but you may want to explore venture capital, personal loans, and grants.

Obtain the Proper Licenses

In order to do business you will need to register your business’ name with your state. This is known as “doing business as” or DBA license. You must get a tax identification number from the IRS, and register for any state or local taxes. You will also need to get any local and state business license and permits.

Hire Your Crew

As an employer you have certain legal responsibilities to your employees and to the government. Contact OSHA to find out the safety concerns pertinent to your business, and get an employer identification number so that you can file taxes. Don’t forget to deal with the three types of withholding taxes; federal, state, and social security. Keep excellent records so that when it comes time to file your quarterly taxes you will be ready.

It may not sound easy to start a business, but if you have a passion and want to see it become a successful business it will take planning and organization. Use these tips to get started and build a business you can be proud of.

8 Benefits of an Online Business

People see internet business through an extremely narrow lens. You’re either flogging your stuff on eBay or you’re trying to make it big and be the next Mark Zuckerberg. The reality is that there are hundreds if not thousands of different ways in which you can do business online. There are tons of different business models that cater to any goal or ambitions that you might be thinking of taking whether its selling other people’s products online as an affiliate or creating your own products and selling them yourself, or maybe you just want to use the internet as an extension of your already established offline business. The possibilities are endless!

The internet is a global population full of enthusiasts of all kinds looking for solutions and products to solve their own personal problems. It’s a global market in which everyday people can take advantage of, all they need is some sort of value to give, or skills necessary to guide people to value that somebody else has created.

The Benefits of an Online Business

Low Start-up Costs:

If the entrepreneur deep down has been calling out to you, you might want to consider the start-up costs on an online business. In comparison to a traditional “Bricks and Mortar” businesses the start-up costs are substantially lower for an online business. A business owner who launches their ventures online enjoy a substantially lower start-up cost than those who choose the offline approach

The “real World” business owner must pay for commercial space, physical inventory, printed stationary and allot more. As an internet business owner, your only real expenses will be your domain name and hosting account. Even if you do need to buy inventory or maybe your outsourcing technical skills to get things started your overall start-up cost will be incredibly lower than your offline starting costs.

Increase In Earning Potential:

If you’re employed full time or working your way up the corporate ladder, your earnings are determined by the amount of hours, and position your in. The time it takes to double your income would be obscene in the offline world, (not impossible, But defiantly harder) say you’re making $80,000 a year, how long do you think it would take to make that $80,000 to $160,000. My guess is a very long time.
Online if you learn to sell one product you can teach yourself to sell 50. If you create 1 successful business what’s to say you can make another, or maybe a few more. There’s a whole market for website flipping. People make a living off creating websites and online businesses and flip them for people who want a business that already has market traction. The truth is that the sky is the limit for your online business.

Job Security:

When you learn the skills required to sell products online, or create some sort of online revenue the chances are that you’ll be able to repeat this process. If you’re willing to learn the skills necessary to take your business to the next level is up to you. There’s not going to be a shortage of affiliate programs or people online to sell to.

Wider network clients and buyers:

If you were to start a business in your country’s capital city or the most populated city in the world, you would be pretty confident that the earning power of your business would be astronomical. There are people making a killing in your local cities with successful businesses. Now imagine how many people are online, online you have access to a huge global network of clients and buyers.

Online you don’t have to compete against other agencies in your area for the same small pool of customers and clients. Instead you have access to an enormousness pool of people in which you only need the tiniest fraction to make yourself an incredibly comfortable living. You’re free to think as big as you want online. There’s no shortage of people or market space.

Free Time:

Wouldn’t you love to have the time to do the things you want in your weeks and days? I remember watching some of Ray Higden’s videos about his story of when he was in corporate America. He says he spent more time with picture frames of his kids then actually seeing them.

Don’t you hate having to wait for traffic, taking orders from a boss, asking permission for taking holidays? Having an online business fixes all of this. You’re able to work at home when you have an online income. You can spend more time with your family, spend time traveling and best of all having the time to do the things that you want to do.

Your business is open and running 24/7

Instead of the 9-5 opening hours of the traditional “Brick and Motor” shop, when you set your business up online its open 24 hours a day, 7 days a week, 365 days a year. You can literally make money while you sleep! You do the work upfront and then you reap the rewards long after you’re done.

You’re even able to automate most aspects if not all aspects of your business depending on your business model. There are endless amounts of products available to help automate your business. By doing this you can turn your online business into a valuable asset that will provide for you constant passive income.

Freedom to Work from Anywhere

You physical presence doesn’t matter when you’re working online. As long as you have a laptop and an internet connection you’re able to work from half way around the world if you want. Where you work is totally up to you, whether it’s in your favorite coffee shop or if it’s while you’re on holidays the decision is totally yours!

The Satisfaction of working for yourself

My opinion is that creating your own business or enterprise beats working for someone else or underneath someone else. The satisfaction of creating your own income and knowing that it’s you that’s in charge of your pay check infinitely more fulfilling then being another cog in the corporate machine.

The principles of Online business success is the same as any offline business. You have to have a great idea, have a good solid business plan and there should be a value proposition for potential clients. With the increase in new technologies getting your business online is become easier and cheaper. The best time to start is right now!

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Andrew