It can be awfully tempting to draw from your savings or access your 401(k) as an option to help fund your dream of franchise ownership and continued growth, but before you do, consider one of the very best options that franchises can turn to: Financing through a Small Business Administration (SBA) loan.

Why Look At The SBA First?

There are plenty of sources out there that will finance a variety of items and you may not need to obtain financing in one big chunk. The bad news? When you’re going into a franchise business as a first-time owner, there’s no history established. Financing sources often prefer to see at least a few years of business operations in place.

That’s where the SBA can help. First, through the SBA 7(a) Loan Program, startups may be able to obtain financing. While trying to obtain financing from a traditional financial institution may very well be a non-starter, the SBA can often provide working capital at an attractive rate with its financing. The loan would not only cover equipment or even a vehicle purchase but also what you need to actually run the business on an ongoing basis, including covering franchise fees and more.

Additionally, the SBA has created the SBA Franchise Directory of all franchises and other brands. The SBA has already reviewed these particular franchises’ Franchise Disclosure documents and pre-approved them for financial assistance. Obviously, it’s not a bad thing to have a solid indication about the types of franchises that the SBA has found favorable to lend to. Now let’s talk about the advantages of the loan itself.

Less Personal Risk To You
With More Guarantees, The Bank Likes Too

Perhaps the biggest advantage of an SBA loan is that, if approved, you may receive up to $150,000 without tying in any personal assets in order to receive it. At that point, it’s purely considered a business loan. Now, asking for a loan over $150,000 may require additional on your end personally but even in this case, the loan typically has a 10-year repayment period at a set monthly payment you can budget for (rather than a large payment that comes due at some later point).

If approved, there are a wide variety of items that you can use the loan for in relation to the business, including direct payment for the franchise fee even before you utilize the funds for anything else.

The SBA guarantees 50% of the loan to the bank, which makes it so favorable. Let’s say you’re interested in opening a Ben & Jerry’s Ice Cream franchise. With them being on the SBA Franchise Directory, you’ve taken a big step toward getting approved since you are associated with that franchise brand. To be clear, however, it’s not a “done deal” in the bank’s eyes. You still need to prove yourself to a financial institution as they evaluate factors such as:

  • Do you have any previous experience owning a restaurant? What did that experience look like?
  • How is your credit score? Good? Excellent? Or needing further repair?
  • Do you have your own capital to inject into the franchise? How much?

That said, even with additional questions to answer, you’re off to a great head start versus having to build a business plan from scratch. You could bring the bank a business plan and it could look spectacular on paper, but the bank still has to ask, “Is this a viable business?”

No such challenge exists with a Ben & Jerry’s or, for that matter, other franchises on the SBA Franchise Directory list. The bank knows that Ben & Jerry’s is a viable business that’s been proven successful on the franchise level many times over. What has to be answered now by the bank is whether or not you are capable of running that franchise to its full potential.

Other Funding Options
We should mention there are other options to consider, such as self-directed retirement accounts – but these can carry risks. If such a route is something you’d like to explore, have an in-depth conversation with your CPA or financial advisor first for a full analysis.

You’ll hear a lot of talk originating from brokers and others about how the 401(k) path of funding is by far the best. We’re not suggesting that may ultimately be the case, but be wary of those who try to steer you too hard toward 401(k) funding because there are substantial risks. Namely:

  • Fees – you know we had to talk about fees in relation to financing, right? There can be thousands of dollars devoted to fees alone, so it’s important to know what those fees associated with the plan entail precisely. In addition, a monthly maintenance fee is likely required. While that monthly fee may not seem like a great amount, it can add up fast, so be sure to account for that.
  • In some circumstances, a special audit may be required on an annual basis to ensure any money taken out of a self-directed 401(k) is being invested toward a legitimate business entity.

Explore The Right Loan
With A Real Partner In Your Corner: OnPace.

During the evaluation period of franchise ownership, there’s little doubt that the SBA Franchise Directory can help clarify things a great deal for you to narrow down the list of the potential franchises you might want to explore further, especially knowing that they have greater pre-approval possibilities. However, it still may not be the shortest list to evaluate.

In addition, you may be interested in a “hot” concept that’s growing across the United States and internationally. On Pace can check if it’s on the SBA Franchise Directory to reveal whether or not that franchise has been pre-approved for an SBA loan.

By talking to one of our trusted experts at On Pace Franchising, we’ll be able to look at your situation from all angles and then factor in the taxes, risk, timeframe and opportunities to help you make a decision that syncs up with your growth strategy. At On Pace, we have a wealth of those financial experts we can connect you with early on and as your franchise evolves. Let’s have the conversation sooner rather than later through a free consultation at 312.436.2748.