SBA government-guaranteed loans are often used for financing the purchase or startup of a franchise business. As with non-franchise businesses, SBA loans have lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans. Since small businesses have traditionally obtained financing from their community banks, and since there are now more big banks interested in middle market and public companies, SBA loans have become a very important alternative to conventional bank financing for them.
Will the typical SBA lender show preference for a loan application to finance a franchise as compared to a non-franchise business? Perhaps the best way to contrast and compare would be to look at the five qualifying criteria for SBA small business loans:
1. Evaluating repayment ability – The easiest way for a lender to evaluate small business repayment ability is to view the track record of earnings and cash flow available for debt service. New business startups without track records bear the burden of predicting income rather than demonstrating past income available for debt obligations. This is true for both franchises and non-franchise businesses. If, however, the small business borrower is affiliated with a franchise, the SBA lender is able to evaluate the track record of the franchisor and its franchisees; therefore, being part of a franchise with a good financial track record can be very helpful. Of course, the longer the successful track record of a franchise, the more expensive the franchise fees become for the franchisee!
2. Evaluating business management experience – A most important ingredient for a successful business, qualified to repay an SBA loan, is the management experience of the borrower(s). It is critical for the SBA lender to understand that management is capable of running the business based upon their education and work experience background. It becomes less essential, if the small business borrower is affiliated with a successful franchise operator. Some franchises actually prefer franchisees without prior same industry experience. It assures them the franchisee is more likely to follow their model for success, rather than trying to run things “their way”.
3. Evaluating the adequacy of owners’ equity – Every SBA lender must require the borrower to use some of his own funds to start the business. No SBA lender can loan 100% of the project cost. The borrower must have some of his own “skin in the game”. Once again, if the SBA small business borrower has affiliated with a franchise that has a successful track record, that can be a factor which lowers the down payment or equity requirement to borrow with SBA funds.
4. Evaluating credit history of the applicant(s) – Affiliation with a franchise will not fix a small business borrower’s bad credit. Good personal and business credit records are required for most types of small business loans.
5. Evaluating collateral sufficiency – SBA loans do not require collateral, if the small business borrower does not have assets they can pledge. With that said, it is always helpful to provide assets for collateral when borrowing small business funds. Having collateral strengthens the transaction. Having an affiliation with a franchise that has a successful track record also strengthens the loan application; therefore, it can positively influence the amount of collateral required for the loan.
In most cases, to receive favorable consideration from an SBA lender, the franchise needs to be one with a lengthy successful financial track record. Affiliating with new franchises, or franchises with poor track records, is not that helpful to the SBA lender. If the borrower believes in the new franchise model, it may be helpful to affiliate for cooperative marketing with other franchisees, for trademarked recipes or operations, or for financial and inventory management systems. With new franchises, however, the lender will not be able to see the benefit of these systems without track record. In summary, the benefits of franchise affiliation for the small business owner can be just what the banker ordered to approve the loan.