As a prospective franchisee, you have a handful of options when it comes to ways to finance your franchise. One of these options is a bank loan guaranteed by the U.S. Small Business Administration (SBA), which is commonly referred to as an “SBA loan.”
While obtaining an SBA loan can help mitigate your financial risk as a franchisee, before you apply for funding, it is important to understand the terms, conditions and residual risks that these loans entail. If you are considering an SBA loan to finance your franchise, here is a brief introduction to what you need to know:
5 Important Facts about SBA Loans for Franchisees
1. An SBA Loan is Not Actually a Loan from the SBA.
As we mentioned above, an SBA loan is not actually a loan from the U.S. Small Business Administration, but rather a loan from a private bank that works with the SBA. When you obtain an SBA loan, the SBA guarantees a portion of the loan, which means that the SBA will pay the bank if you are unable to do so.
2. The SBA Does Not Fully-Guarantee Franchise Loans.
While the SBA will guarantee a significant portion of your loan, it will not guarantee your entirely. Depending on the amount you borrow, you may still need to personally guarantee 15 to 25 percent of the loan for your franchise. You will also need to make a down payment, and you may need to pledge assets as collateral.
3. In Order to Receive SBA Funding, You Must Choose a Franchise Listed on the SBA’s Franchise Directory.
With revisions to the SBA’s franchise lending program that went into effect on January 1, 2018, in order to be eligible for an SBA guarantee, you must choose a franchise listed on the SBA’s Franchise Directory. While the SBA has certain approval criteria, the fact that a franchisor is listed in the directory is not a reflection on the viability or profitability of its franchise opportunity.
4. If You Obtain an SBA Loan, Your Franchise Agreement Should Include an SBA Addendum.
The U.S. Small Business Administration requires all franchisees who receive SBA-guaranteed loans to have certain provisions in their franchise agreements. While a franchisor may offer these terms to all franchisees, it is more likely that you will need to sign an SBA Addendum.
While this addendum is designed to protect the SBA and its lending partners, it also offers additional protections for franchisees. However, the addendum terminates once your loan has been repaid in full.
5. Free Information about SBA Loans is Available.
If you would like more information about SBA loans for franchisees, you can find free information on the SBA’s website. You can also contact us for a free consultation, and franchisee lawyer Jeffrey M. Goldstein will be happy to help you understand the funding options you have available.
Contact the Goldstein Law Firm for a Free Consultation
To schedule your free consultation with franchisee lawyer Jeffrey M. Goldstein, please call (202) 293-3947 or request an appointment online. With offices in Washington D.C., we have over 30 years of experience representing prospective and active franchisees nationwide.