Tips for Finding a Franchise Loan
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Franchisees in search of financing have had it rough the past few years. But it's not all gloom and doom on the lending front. Recent numbers for SBA franchise loans--issued by banks but guaranteed up to 85 percent by Uncle Sam--are encouraging. In the 2011 fiscal year, the agency approved a record-setting $19.6 billion in 7(a) loans, the most common type of loan it offers. More than $1.5 billion of those were for franchise businesses, up from approximately $826 million the previous fiscal year.
For a closer look at the franchise loan landscape, we spoke to Steve Smits, associate administrator for the Office of Capital Access at the SBA. Smits oversees the agency's loan programs.
What's the outlook for SBA franchise loans in 2012?
It's trending in the right direction. It continues to be a challenging environment for securing financing. A business owner needs to put the same level of attention into securing the necessary financing for their business as they put into creating their business plan.
I'm encouraged by the direction lending is heading. The percentage of our 7(a) loans going to franchise concepts has increased steadily in the last several years, about 5 percent year over year.
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I'm also encouraged by the engagement of many franchise organizations, such as the International Franchise Association, with those in the SBA lending community. I've noticed this past year that there's a strong working relationship between the two.
Are lenders loosening their grip on credit for franchisees?
I talk to banks every single day. They're talking about their plans to grow and to expand. They see opportunities as we look forward into 2012, and that only means there are going to be increased opportunities for small businesses to find the capital they need.
During the recession, we saw about 1,200 lending partners use our programs for the first time in many, many years. They came back because that credit enhancement provides that little extra oomph lenders need to get to a yes. Once these lenders use our programs, they typically continue to use them. That always translates into more access to capital for small businesses.
What percentage of startup funding should franchisees bring to the table?
For most startup businesses, it's a good idea to plan to have approximately 20 to 25 percent, maybe 30 percent, to put down and to borrow the rest. There are some lenders who will lend more, and there are some lenders who will require more of a down payment.
Most of our lending partners will expect the business owner to share in the risk. It's not reasonable for a business owner to expect to receive 100 percent financing from their lender.
Is it easier to get a smaller SBA loan than a larger one?
It's really case by case. As you take a look at the lenders in your community, look at how many SBA loans they've done. Look at the dollars they've lent. There are some lenders who specialize in small dollar loans and others who specialize in larger loan sizes.
One initiative the agency introduced this past year is our Community Advantage program. For the first time, we opened up our SBA 7(a) loan program to what we call mission-based lenders. These are small, nonprofit lending organizations. Generally their mission is to serve local neighborhoods in underserved areas, rural or urban. So this will mean more points of access for small-business owners.
What other tips can you offer franchisees?
I can't stress enough the importance of aligning yourself with local professionals, whether it's a Small Business Development Center or your local SBA district office. These offices are staffed with professionals who look at business plans every day. Use them as an objective set of eyes.