How the SBA Process Works when Franchising

Childcare franchising is an excellent way for entrepreneurs to take control of their finances while making a difference in the lives of local families. However, if you’re lost on how to obtain funding, we’ve got you covered. Ducklings walks franchisees through each step of the funding process to guarantee success. Below, we outline how to start the SBA loan process so you can feel confident in taking the next step towards your career goals. 

What are SBA Loans?

The Small Business Administration (SBA) offers a variety of financing options for entrepreneurs who seek to to open their own franchise business. However, a franchise must be listed in the SBA Franchise Directory in order to apply for loans. Once franchisors have filed the appropriate paperwork, a franchise can be listed in the Directory and “lenders can process loans without further review of the franchise documents.” Better yet, there are no application fees to join the directory. 

These franchise loans can be used towards startup expenses such as working capital, securing a building or land, or buying equipment for the location. SBA loans are financed by various SBA-approved financial institutions and are not issued directly to franchise owners. Fortunately, the SBA has a Lender Match Tool to help franchisees get in touch with qualified SBA-recognized lenders in their local area. 

For instance, Ducklings Early Learning Center is listed on the SBA Franchise Registry, meaning the organization approves of Ducklings’ operations and therefore offers financing opportunities to entrepreneurs. 

What is a 7(a) SBA Franchise Loan? 

There are various types of SBA loans available and each have their own purposes and terms, but here we will focus on the most common loan: the (7A) loan. The 7(a) loan program is generally what comes to mind when discussing SBA loans. Typically, business owners will apply for a 7(a) loan unless there are special circumstances. This type of loan can be used for general financing such as working capital, purchasing real estate or equipment, fixed assets, and refinancing existing debts. Standard 7(a) loans have a maximum loan amount of $5 million, and the loan can extend up to 25 years depending on how the franchisee uses the funds over time. Most loans for equipment purchases or working capital have a term of five to 10 years. 

Moreover, for “most 7(a) loan programs, the SBA can guarantee up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000. However, SBA Express loans carry a maximum of 50 percent guaranty and Export Express loans carry a maximum 90 percent guaranty. The Export Working Capital loan program and International Trade loans carry a maximum of 90 percent guaranty, up to a guaranteed amount of $4.5 million.”

Additionally, loan interest rates set by lenders can either be fixed or variable. With that being said, lenders must comply with SBA regulations. “For example, an SBA 7(a) loan interest rate cannot exceed a certain percentage over a standard base rate—such as the prime rate (3.5% as of April 25, 2022). The maximum variable interest rate for SBA 7(a) loans of $50,000 or less is 9.75%, while the maximum variable rate for loans larger than $50,000 is 7.75%.” On the other hand, the maximum fixed rate for a loan of $25K or less is 11.5%. Case in point, the rate will vary, so the interest rate and repayment details should always be examined before moving forward with a loan.

What Documents Do You Need to File for a 7(a) SBA Franchise Loan?

While requirements may differ between lenders, franchisees typically need to gather the following documents to apply for a 7(a) loan: 

  • SBA loan application form (Form 1919)
  • Personal background and financial statements 
  • Business financial statements
    • Profit and Loss Statement 
    • Projected Financial Statements
  • Ownership and affiliations (list of names and addresses of any subsidiaries and affiliates)
  • Business certificate or license
  • Loan application history 
  • Income tax returns 
  • Resumes for each principal
  • Business overview and history 
  • Business lease

If you are purchasing an existing business like Ducklings, you need to include:

  • Current balance sheet and P&L statement of business to be purchased
  • Previous two years’ federal income tax returns of the business
  • Proposed Bill of Sale including Terms of Sale
  • Asking price with schedule of inventory, machinery and equipment, furniture and fixtures

An attorney and accountant can help franchisees gather these documents and assess all associated costs and taxes of buying and managing the business. 

What is the SBA Franchise Loan Approval Process?

Franchisees can expect the SBA loan process to take up to three months. However, SBA-preferred lenders can potentially reduce the processing time because they can make final decisions without SBA approval. 

If a franchisee prequalifies for a loan, they do not have to move forward with the loan request until they are ready to make a commitment. This can include steps such as signing a lease, obtaining a building permit for the location they are leasing, or needing to sign a letter of intent (LOI) to purchase a building or land for a franchise location.

Ducklings helps franchisees navigate the loan process by helping them put together a comprehensive loan package and SBA application to submit to the lender to underwrite. This includes our streamlined business model, marketing strategies, supplier links, training program, financial projections, and a vetted real estate location. Franchisees also often need to offer information about the business such as a personal financial statement, federal income tax returns, articles of organization, and business licenses. This process can take up to a week depending on the complexity of the loan borrower’s finances, and the lender often takes a few weeks to make a decision once the application is submitted. 

If the lender approves the loan request, the underwriter gets in touch with the franchise and the bank will send a commitment letter. The franchisee will sign the commitment letter agreeing to set terms and conditions and send it back to the lender to begin the closing process. Documents such as the note, collateral documents, personal guarantees, and more are prepared and reviewed. If all parties agree on the terms and conditions of the loan authorization, the loan is closed and disbursement follows according to the authorization.

Join the Ducklings Franchise

For over 25 years, Ducklings has operated as a successful childcare program that has expanded throughout the Mid-Atlantic region. With an emphasis on a consistent curriculum developed by early education experts, Ducklings strives to offer high-quality childcare and education for local communities. Franchisees can duplicate their successful business model, obtaining full access to lesson plans, training, teaching, and brand standards. For more information on joining their franchise, call (484) 607-8248 or visit our website for more information.