Grow your Franchise System: Four SBA Loan Tips for Getting your Candidates Funded

By Rocco Fiorentino, CFE, and Dallas Kerley

According to FRANdata's most recent volume of the Small Business Lending Matrix, the good news for the franchise industry is that the business climate is improving for the fifth straight year, with unit transactions at their highest since 2008. The not-so-good news? While access to capital has improved, it remains a challenge for potential franchise owners. That's why if you're a franchise system looking to grow, it's critical you assist your candidates in securing the funding they need to start or grow a franchise. If you put all the responsibility on the candidate, it could slow the process, or worse, cause the deal to fall through due to their inability to obtain funding. While your candidates have a variety of funding options to choose from, U.S. Small Business Administration loans seem to be trending back in vogue now. The benefits of these types of loans include smaller down payments, better interest rates and longer payment terms.  However, the process for securing them remains complex and often unpleasant if not done properly. Don't let this deter your candidates. Here are some tips for navigating the challenging loan application process.

1. Use a Pre-Qualification Tool to Determine “Fundability” of Candidates

A pre-qualification tool is now available to help you and your candidates know upfront if your candidate pre-qualifies for financing to purchase your franchise. Pre-qualification reports typically include: the Small Business Scoring Service by FICO which the SBA uses to determine eligibility for small business 7(a) loans up to $350,000; and the candidate's FICO credit score.  This is worth looking into as it typically costs under $100, but can keep your candidates (and you) from wasting time if they don't qualify for your concept. Some funding partners, including Benetrends, offer this as a free resource to qualified candidates.

2. Find Out Which Lender Prefers Your Flavor

What flavor ice cream are you? Different lenders have different credit boxes and different appetites for a particular franchisor's flavor or concept. Some banks like chocolate, some like vanilla. Knowing which lender favors your particular flavor is vital to making sure your candidates don't waste precious time going to one wrong bank after another only to be denied repeatedly. The process can be sped up by choosing the right partner who knows and monitors what concepts various lenders are looking for, and can help your candidates apply early to the bank that prefers your flavor.

3. Identify the SBA loan options available

There are a variety of loan programs available through the SBA including specific ones for veterans, disaster recovery and businesses working to control pollution to name a few. The two most popular are the 7(a) and 504 loans, are more generally focused on helping small businesses start and grow. Here are specifics on these two types of loans:

4. Know the Requirements (and often overlooked solutions for meeting them)

Several requirements need to be met to obtain an SBA loan. These typically include:

•  20 percent to 30 percent of the total loan amount plus the needed working capital. For example: If you need $150k to purchase your franchise and $50k in working capital, for a total project cost of $200k, the bank would require you to inject $40k to $60K toward the project, and the bank would provide an SBA loan for the balance.
• The money for the capital injection must come from your own liquid assets, or tangible assets converted to liquid.
• Some form of collateral that can be a combination of business and personal assets such as furniture and fixtures for the business, equity in your home, real estate or other investments.

For candidates who don't have sufficient savings to meet the equity injection requirement, don't despair. Review the information in the accompanying box “Two Ways to Obtain an Equity Injection for an SBA Loan”for two often overlooked solutions. Starting your candidate off on the right foot with funding is one of the most important keys to their success. The last thing you want is for a candidate to enter into your system underfunded or with an unmanageable debt load. While an SBA loan is one of the more popular options now for candidates, it's by all means not the only option. There a variety of funding options available to candidates, and many times more than one funding solution can be the answer to unlocking the capital they need. Fortunately, you are not alone in figuring out the best funding strategy for your candidates. By partnering with a trusted lending partner, you can make sure your candidates get the funding they need quickly, safely, and economically, so that you can grow your franchise system.

Two Ways to Obtain an Equity Injection for an SBA Loan

A common question we are often asked is: "Where can I get the money needed for an SBA loan?" Here are two options to help your candidates unlock the necessary funds:

401(k)/IRA Rollover Funding

A growing number of business borrowers have met their equity injection requirement for SBA loans thanks to their existing retirement funds. Often called 401(k) Rollover funding or ROBS (rollover for business start-up), this type of program allows retirement funds to be used tax-deferred and penalty-free. While a 401(k) rollover used in conjunction with an SBA loan has proved successful for funding many new franchises, many entrepreneurs rely solely on retirement plan rollover funding, thereby bypassing the need for a loan altogether.

Securities Backed Loan

Similar in concept to a home-equity loan, a Securities Backed Loan is backed by securities held in an investment portfolio, rather than equity in an applicant's home. This type of loan often makes more sense than selling stocks to raise needed capital for an equity injection since cash needs are satisfied without disrupting investment strategies, asset allocations or creating unexpected tax consequences. Additional benefits include favorable interest rates, easy terms, approval within 48 hours and funds within 10 business days. Rocco Fiorentino, CFE, is president and CEO, and Dallas Kerley is chief development officer at Benetrends Financial, which provides franchise funding solutions. Find them at fransocial.franchise.org.