Small Business Today Magazine JUL 2014 PHENOMENAL PRODUCTS | Page 30
EDITORIALFEATURE
SBA Loans for Franchises
By Bruce Hurta, Business Lending Manager
S
BA 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 that 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
28 SMALL BUSINESS TODAY MAGAZINE [ JULY 2014 ]
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 a 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.
You can learn more about SBA lending and small
business finance on Bruce’s blog at brucehurta.wordpress.com. For more information about SBA real estate loans for small businesses, contact Bruce Hurta,
Business Lending Manager at Members Choice Credit
Union, by phone at 281-384-2595 or by email at [email protected].