A large percentage of franchise investments are made through SBA (small business administration) backed loans. The concept of an SBA franchise loan is that the bank is essentially able to have their loan to the franchisee guaranteed by the SBA allowing them to offer funding at a lower interest rate. In order to qualify for this, a franchise buyer must go through a more stringent level of approval and qualifications in order to finalize the loan process.

This requires that the buyer typically will need to meet certain criteria such as a minimum 680 credit score, no bankruptcies in the past 10 years, 30% of the loan amount in available cash, and a total net worth of 1.5 times the value of the loan. The SBA also requires that the franchisor offering the franchise being financed be approved with the SBA franchise directory.

The SBA franchise directory is a division where the Small Business Administration has reviewed the company’s FDD, franchise agreement and materials related to the franchise offering. Once approved, the franchise then is listed on the directory for any bank to use for making decisions as to whether they will fund a SBA loan for a franchise investor.

The buyer now has the opportunity to go through funding faster, and more efficiently, and your franchise brand is effectively given preference over other offerings when in consideration by the lender.

When you franchise your business and bring a new brand to the market, it is critical to have funding options aligned with your offering and your brand. As a new franchise with either no franchises open or only a few, your offering is put under a greater degree of scrutiny than a proven franchise system. Being registered with the SBA will play a significant role in how effective you will be in selling your first franchises.