Learn how an SBA loan can help fund your dream

Thousands of entrepreneurs use the franchising model to open and operate successful businesses every year. According to the International Franchise Association, there are 773,600 small franchise establishments across the U.S., which represents 3% of the total Gross Domestic Product (GDP). These establishments supported nearly 8.6 million direct jobs, equating to $787.5 billion of economic output for the U.S. economy.

However, entrepreneurs often face challenges when it comes to obtaining the capital needed to open and operate a new franchise business. “This is especially true for new entrepreneurs who haven’t owned and operated a business before,” says Cadence Bank Vice President and SBA Banker Ryan Stoll, “such as long-time corporate executives who have decided they want to leave the corporate world and be in business for themselves.”

Fortunately, a financing solution exists that can help entrepreneurs obtain capital to open new franchise businesses or acquire existing franchise locations.

SBA Loans Are an Ideal Solution

“SBA loans are ideally suited to helping new franchisees get the financing they need to make their business ownership dreams come true,” says Stoll.

The U.S. Small Business Administration works with lenders to help small businesses (including franchisees) obtain financing. The SBA doesn’t make loans itself; rather, the SBA guarantees repayment of a portion of the loan. This enables banks to lend to many businesses that might not qualify for traditional financing.

According to Stoll, SBA 7(a) loans in particular offer several unique benefits to franchisees when compared to traditional bank loans. “The biggest benefits are that the loan’s terms and structure are generally more favorable to the business,” he says.

For example:

• SBA 7(a) loans feature 10-year repayment terms, compared to three-, five- or seven-year repayment terms for most traditional business loans.
• 7(a) loans also have lower down-payment requirements — as low as 10%, compared to 20-30% or more for most traditional business loans.

“Franchisees usually want to put as little money into the business as possible on the front end and get the longest payment terms possible,” says Stoll. “So these are huge benefits for franchisees, because they have to put less cash into the business upfront, and they have longer to repay the money.”

SBA 7(a) loans are best for owners who are opening or acquiring up to 10 franchise locations, says Stoll. “The funds can be used to finance all project costs related to the purchase of the franchise,” he adds.

SBA 7(a) Loan Details

The maximum SBA 7(a) loan amount is $5 million. The SBA guarantees 85% of loan amounts up to $150,000 and 75% of loan amounts above this amount and up to the maximum. This guarantee helps reduce the bank’s risk when making the loan, which allows banks to use more flexible underwriting criteria when analyzing SBA loan requests.

Stoll says he often calls SBA 7(a) loans “the ultimate capital preservation tool. When starting a new business, it’s critical to have as much liquid capital as possible, because this is what you need to pay the bills. An SBA 7(a) loan helps you preserve precious capital.”

He points to two more valuable benefits of SBA 7(a) loans for franchisees:

• There are no prepayment penalties for SBA loans with a term of 15 years or less, so if your cash flow allows, you can pay off the loan before the maturity date. In fact, Stoll says that SBA 7(a) loans are paid off in an average of just under seven years.
• All closing costs associated with acquiring a franchise business can be financed with an SBA 7(a) loan. This additional financing flexibility can help franchisees get their businesses ramped up and stabilized more quickly.

Work With an Experienced SBA Franchise Lender

Stoll stresses the importance of working with a bank that’s experienced not just in SBA lending, but also in franchise financing.

“This really puts you ahead of the curve,” he says. “There are a lot of nuances in the franchise world that an experienced banker will understand much better than a banker who hasn’t done much SBA franchise financing. This will help streamline the underwriting process and minimize potential delays in obtaining financing.”

Cadence Bank is an SBA Preferred Lender, which means we can approve SBA loans independently, without review and approval by the SBA, saving the borrower their most precious asset – time! Our SBA loan experts have extensive franchising experience, and they are dedicated to helping small business owners obtain the financing they need to make their dreams come true.

Please contact us if you have more questions or wish to speak with a Cadence SBA loan expert. We are committed to your success.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.