From fitness to fast food, preschools to plumbing, it’s widely known that franchise financing has become a proven method to skyrocket sales. Instead of typically leasing your building, you will be granted the ability to finance and build your own facilities using long-term, fixed-rate financing. The Small Business Administration (SBA) 504 Program offers the assistance needed to overcome the high financial entry barrier with construction, heavy equipment, machinery, and commercial real estate loans.
What is an SBA 504 Loan for Franchises?
SBA 504 loans for franchises are organized by Certified Development Companies (CDCs) and overseen by the federal government in funding small businesses to purchase, construct, and renovate buildings, along with obtaining factory-grade machinery and equipment. Part of the benefits of this loan is franchise financing for commercial real estate and capital asset acquisition. Some opportunities of the SBA 504 loan include a low down payment, up to 90% financing coverage, a below-market fixed interest rate, and low-risk credit.
The SBA 504 loan process requires an extensive application but can be just the financial boost a franchise owner needs. Two lenders fund the SBA 504 program: 40% through the CDC lender and 50% from a third-party lender or bank, with 10% remaining equity from the franchise owner. Other factors affect franchise down payment costs, like operations of less than two years or having a special purpose property. Each of these details subsequently increases the down payment by 5%.
Additionally, the SBA 504 loan program under 504 Capital finances owner-occupied real estate, where the franchise owner occupies the business he’s purchasing with a 51% occupancy. This allows for 41% free space for rental tenants and increased income revenue.
How to Apply for an SBA 504 Loan as a Franchisee
The SBA 504 loan process operates like any other loan program, with one catch: you must start by confirming your franchise’s eligibility for SBA funding.
Read the Requirements and Guidelines
The franchisee can access the SBA Franchise Directory to seek eligibility per the official SBA Franchise process. If applicable, the Franchise Team will review your franchise documentation, agreements, and relationships between the SBA applicant and the third-party lender that meet the Federal Trade Commission’s (FTC) definition of a franchise. If your franchise is not on the registry, it just means that you need to go through the SBA approval process.
Review Your Documents
Documentation required varies from lender to lender. Here are some general criteria you should expect to provide:
- SBA 504 loan application form and signed franchise agreement
- Documentation of any subsidiaries and affiliates
- Records of previously applied loans
- Business’s extensive history
- Solid business plan and collateral
- Personal and business financial statements
- Personal and business tax returns (past three years)
- Construction contractor estimates
- Equipment cost documentation
Additional information may include your credit score, net worth, available liquid capital, and in some cases, Form 2462— an addendum to the financial agreement that makes any signed document related to franchisor control inapplicable. You may also need to supply a personal guarantee for repaying the loan (liability) and separate forms per franchise unit location.
Submit Your SBA 504 Loan Application
Upon submitting your SBA 504 loan application, you now must abide by the SBA post-closing procedure. This includes supplying lenders involved with further documentation and answering any remaining questions. Remember to understand your loan’s interest rate, repayment terms, and other essential details before solidifying your SBA 504 loan.
The SBA 504 loan process is generally time-consuming, ranging from two to three months to secure the loan. That’s why acquiring an SBA-preferred lender like 504 Capital is key to getting your SBA 504 loan approved quicker.
504 Capital: The Gateway to Franchise Financing
If you’re a franchise looking to elevate your business’s fixed assets, seek an SBA 504 loan. 504 Capital’s team of Certified Development professionals knows the ins and outs of all things SBA 504—with exceptional financial assistance in Virginia, Maryland, and North Carolina.
Call us at 757-623-2691 or Contact us to streamline your franchise’s financial growth.