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    SBA Loans to the Rescue?

  • Small Business Administration loans can help quick-serve operators get the financing they need to open a new store, but the process isn’t easy.

    Those buying a franchise can take advantage of the SBA’s Franchise Registry, which is a directory of registered franchisors that banks can use to identify and get information about a particular business. The registry allows banks to streamline their loan processing since due diligence on the franchisor is already completed.

    “If the franchise is a solid, proven concept and it’s doing well, you’re going to be looked at more favorably by the bank,” Beeson says. “And of course, if you’re doing well with one and looking to buy another, they’ll also like your application.”

    While some might think that climbing Mount Everest in a snowstorm is easier than getting an SBA loan, the picture isn’t entirely bleak for would-be quick-serve operators. “While we’re not in the easy credit era that we used to be, you have to remember that banks still make money-making loans, and the key is to show that you’re a solid business and a good credit risk,” Rowe says.

    For startups, that can mean taking on a more experienced business partner. “If you’re talking about the quick-serve industry, banks really want to see that at least one of the main partners has significant management or ownership experience in that area,” Rowe says. “It’s just as important as the capital you’re bringing to the deal. They don’t want to deal with a poor management team.”

    It can also pay to work with a loan consultant who is familiar with the market and can help create a winning application package. “Getting all of the paperwork complete and together is half the battle,” Beeson says. “It’s also valuable to have someone who knows where to shop your loan to get the best outcome.”

    Beeson says operators should also move their business accounts to the bank that they’ll be applying to before filling out the loan applications. “That shows you have some commitment toward them, and it makes getting through the paperwork easier,” she says.

    In addition to the large 7(a) and 504 loans, there is a micro-loan program for startup entrepreneurs with amounts up to $35,000, or up to $50,000 in what the SBA determines are underserved communities.

    “This can help as part of the financing package when you can’t qualify for a traditional SBA loan,” Johnson says. “It’s combined with equipment leasing and maybe private money lending.”

    Leasing is becoming an alternative to the stringent SBA loan criteria. “In many cases, we can take someone’s down payment that they were going to use for an SBA loan and combine it with a lease agreement for their needed equipment and furnishings, and add in a credit line or an SBA micro loan,” Johnson says. “There are also options like rolling the funds in a retirement account without a tax penalty, or securing a portion of the funds needed through private lenders.

    “The payments may be a little higher, but you’re going to get your money faster and there are fewer hoops to jump through,” Johnson says. “This is becoming the main road for startup franchisees because of the SBA loan limitations on them. When they become successful and are ready to expand, then they can go after the SBA funding.”

    The main advantage to having a large leasing component is that there’s no collateral requirement for that portion. “The lease payments can also be fully written off on taxes, and you just have greater flexibility,” Johnson says.

    Overall, the experts suggest a close investigation of all funding sources, including SBA loans, when searching for capital. “It’s not a bad idea to ask some successful franchisees in your company to find out about their loan experiences to see how it went and who got them the funding they needed,” Johnson says.