How To Get SBA Financing for Your Franchise

franchise your business

Franchising offers business owners the opportunity to be associated with a well-established brand name and product line, while remaining independent operators. Franchise opportunities are available in many fields and are particularly common in retail and hospitality. Fitness centers and hair styling also feature high on Entrepreneur’s 2017 Franchise 500 Ranking.  

Franchises are recognized as qualified recipients of the Small Business Administration’s (SBA) 504 loans, an affordable financing option available to small business owners. Franchises have the same options for 504 loan financing as all small businesses and reap the same benefits. Franchise  owners in need of real estate or franchisees who want to expand should consider it among their financial options.

The Costs of Opening a Franchise

The requirements for opening a franchise and the amount of financial support you receive from your franchisor varies across a wide range depending on the franchise. The costs of a franchise include a one-time franchise fee and ongoing royalty payments. You will also need inventory and working capital to open with, and you may be charged an advertising fee. You might be required to purchase and install specific signage as well. According to the Entrepreneur list, you can open a 7-Eleven store or a RE/MAX realty office for under $50,000, while a Hilton or Intercontinental hotel starts at several million dollars.

Training in standardized operating procedures, followed by ongoing support, such as consultations, collective buying and ready-made packaging, are usually available to franchisees and are part of the attractiveness of this business model. The Small Business Administration has its own business educational programs to support borrowers.

How to Finance Your Franchise

As with any business, opening a franchise can be risky. You should research your potential franchisor thoroughly and shop around, as the conditions franchisors offer can be quite different. You will also want to choose a franchise that will thrive in your local market.

Many franchisors offer finance plans to new franchisees, although they are often only willing to finance a small portion of the total project cost. In addition, there are secondary companies that offer financial services, like lender matching, specifically to franchisees. Many of these companies specialize in a small circle of franchisors, making this type of financing easier to receive for some companies than others. As always with non-bank lenders, the business owner should study the conditions offered by these lenders carefully, as they may compare poorly with bank financing.

Banks often finance franchisees. To qualify for a bank loan, you need an excellent personal credit history and collateral. The creditworthiness of the franchisor is also taken into consideration by the bank—your financial future will be bound up with your franchisor from then on.

Franchising and the SBA 504 Loan

Often banks are more willing to work with a client within the 504 loan program. The 504 program has advantages for both the borrower and the bank.  A 504 loan can help a business owner purchase real estate or equipment for their franchise with only 10% down and at a fixed, below-market rate. It is often the best option available to a small business owner. A 504 loan covers:

  • the purchase of land or buildings
  • the construction of buildings
  • the purchase of equipment with a service life of ten years or more
  • improvement, upgrading or renovation of buildings or equipment

The 504 loan is administered by Certified Development Companies (CDC) like TMC Financing and individual loans are granted in conjunction with a conventional lender. Your CDC can help you find the best bank to partner with for your project, if you want. The conventional lender provides 50% or more of the total project cost. Your CDC facilitates the SBA loan for up to 40% of that amount, or $5 million ($5.5 million for a manufacturing project or if the project includes energy-efficiency measures). You provide a down payment of 10%.

The only difference between a 504 loan to a franchise business and to any other business is that franchisees and franchisors may have to sign an addendum to the loan agreement to confirm that the franchisor does not have excessive control over the property being financed. In other words, the SBA wants assurances that its small business loan is going to a real small business.

How TMC Franchising Clients Benefit From the 504 Loan

TMC client Linda Fong received a 504 loan to open a new production facility for her FASTSIGNS franchise in May 2017. She is the owner of FASTSIGNS Oakland and Hayward. FASTSIGNS sign, graphics and visual communications centers provide comprehensive visual marketing solutions to help customers communicate their message across all of their customer touch points including décor, events, wearables, digital signage and marketing materials. Fong opened the Oakland FASTSIGNS in 1995 and expanded into Hayward in 2007. She opened a new 2,992 square foot production facility in Oakland, the  $715,528 project financed with a 504 loan facilitated by TMC.

“Our new production space will improve our workflow and accommodate new equipment in Oakland, and allows us to increase efficiencies with a dedicated, climate-controlled facility in Hayward to further develop our vehicle fleet graphics division,” Fong said. She found out about TMC by word of mouth—her husband has a hair salon and one of his customers told him about their positive experience with TMC and the 504 loan process.

“I grew up in Oakland and have owned my Oakland FASTSIGNS sales center on Franklin Street since 1995,” Fong added. “I am excited about the changes we have seen in the East Bay over the past two decades and especially within the last five years; we are extremely grateful to be a part of it!” 

TMC is a national leader in hotel financing, and 80% of the hotels they finance are franchises. TMC helped finance the sale and renovation of the 90-unit Holiday Inn Express in Temecula. It was the second time TMC had worked with these owners. Sellers Sapna and Sharad Khandwala’s Alps Group of Hotels used a 504 loan from TMC when they purchased the hotel in 2011, and woman-owned Starwood III Hospitality turned to TMC again when the hotel changed hands. Starwood financed the  $11.3 million project with a 20-year 504 loan.

“I am very happy with the SBA 504 program,” Starwood managing member Lipsa Patel said. “The loan has helped my company to expand to a new venue in the Southern California area. TMC assisted us in the lending process and we were pleased to get help from [them].” Patel is operating the hotel.

TMC also helped restaurateurs Nirpal Dhaliwal, David Nguyen, Jack Nguyen, and Gurpreet Dhaliwal purchase an Original Mel’s Diner in Concord that they were leasing. TMC financed their  $2.6 million project in 2016. Original Mel’s has 18 diners throughout Northern California and Nevada. The Dhaliwals are husband and wife, and the Nguyens are brothers. They already owned the Mel’s in Sacramento together.

TMC Financing is a Premier Certified Lender with the SBA with over 35 years of experience in California and Nevada. If you would like to learn more about the 504 loan, contact a TMC 504 loan expert today. If you are ready to start your franchise, we would be happy to talk to you about opportunities for franchise financing and to guide you through the 504 lending process.