Whether you are thinking of opening a franchise or looking to improve one you already have, finding the funding can seem like an impossible task. The Small Business Bureau has a couple of loan programs you can use as a franchisee, the 7(a) and 504 loans, to buy or improve property, purchase equipment and inventory or even for working capital as you stabilize cash flow. The SBA is not a lender, but will help you guarantee loans through these programs, making investing in your company less of a risk for bank underwriters.
7(a) Loans
This loan program is available for small businesses to cover a variety of start-up costs as well as to provide working capital until you can get the cash flowing. A franchise cannot use this type of loan to cover ongoing fees to the franchisor, but it can be used for the initial ones. The ways in which you plan to use this funding will determine some of the terms and conditions you have moving forward. For example, if you are purchasing owner-occupied commercial real estate, then you can have up to a twenty-five-year term; but working capital will have a seven-year term cap. 7(a) loans require a minimum of ten percent down on the loan amount and get up to five million dollars.
504 Loans
The 504 loan program offers less flexibility, a higher amount limit and are a bit more complicated than the 7(a) program. These require working with an SBA Certified Development Company which is a local non-profit focused on economic development in the area. The SBA CDC will lend around forty percent of the loan amount with the bank lending half and you contributing the rest. You can use 504 loans to buy equipment and to purchase or renovate real estate for the business. This loan will not cover any franchisor fees or working capital but will come with terms between ten and twenty-five years. The cap for this type of loan is higher than the 7(a) program by half a million dollars.
Opening or improving a franchise location comes with many costs such as real estate, equipment, and inventory. You can get help in financing these costs from the SBA loan programs. The various programs come with requirements and qualifications that you will have to meet, but an associated bank can help you navigate the process and choose the right one for your needs. Working with the SBA can give you access to more capital than you would have on your own.
