When considering franchise ownership, few activities will have as much of a long-term impact on your business as obtaining adequate financing. Cash is king in a new business. It is advisable to over-capitalize to account for unforeseen issues rather than find yourself struggling after being open a short time.
An SBA loan can be a valuable tool to access the capital you need to get started owing a franchise. The U.S. Small Business Administration (SBA) is one of the largest government agencies. They provide a guarantee to lenders on a portion of the loan, in order to incentivize them to lend money to qualified borrowers. This alleviates some of the risk for banks, which makes them more willing to approve SBA loans for small businesses.
Even though many banks offer SBA loans, they can still be selective about the types of industries they work with, the number of startups they lend to, and the kinds of business expenses they cover. That’s why it is beneficial to work with a funding partner who already has an established network of lenders who are franchise and small business-friendly.
How do lenders determine if a loan candidate is qualified? Each situation is unique and dependent on many factors including business type and location as well as an individual’s finances, but there are four main areas of focus:
Credit
Credit is one of the first things that lenders look at when considering a loan application. Banks usually require a minimum credit score of 680 to qualify for an SBA loan. They also like to see responsible credit history. This includes things like on-time payments, healthy credit-to-debt ratios, and no credit collections, recent and numerous inquiries, or recent bankruptcies.
Equity
Loans are a two-way street, so lenders want to make sure that you have “skin in the game.” Equity for SBA loans often takes the form of 10%-30% of the total startup cost. This number depends on a few things, including the type and size of the loan, and the borrower’s financial health. Many people who don’t have the cash required for a loan use a Rollover for Business Startup (ROBS) plan to access the funds they need to qualify for a loan.
Collateral
With SBA loans, borrowers are required to pledge business assets, such as equipment or inventory. They may also be required to pledge personal assets. This is to add security for repayment on the loan, since repayment is always a banks’ main concern. Collateral repayments vary, but real estate is the most common form of personal collateral. Assets like land, stocks, bonds, and cash are also considered.
Burn Rate
Lenders want to know that you’ll be able to pay them back, which is where burn rate comes in. Burn rate measures your ability to cover personal debt and expenses, plus 6-12 months of the new loan payments for your business, and any business payments made with outside income and liquidity. This is important for when your business is getting up and running, since it can take time for a new business to break even.
SBA loans can be complicated, and the stakes are high. That’s why it’s always best to work with a trusted professional organization.
Nobody wants to waste time and money on a soft pre-approval, only to be denied the loan. FranFund’s FranScore is a reliable pre-approval process. In fact, 99% of the clients pre-approved by FranFund ultimately receive approval for their loan. If you’re considering business ownership or have any questions about funding strategies, we’d love to hear from you.