How to Buy a Franchise with an SBA Loan

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How to Buy a Franchise with an SBA Loan

Buying a franchise has advantages and disadvantages. 2016 Best and Worst Franchises to buy and how to finance with an SBA loan.

Franchise Financing: Using an SBA Loan to Buy or Start a Franchise

Using an SBA loan to buy or start a franchise allows you to leverage your money and provides more favorable loan terms:

  • Lower down payment: 10-30% depending on the strength of the franchise
  • Lower interest rates: 5-7%
  • Longer loan terms: 10 years without real estate, up to 25 years with real estate
  • Working capital included

It is important that you check the SBA Franchise Directory to see if the franchise is eligible for an SBA loan.

SBA Franchise Registry – check franchise financing eligibility here

You’ll also want to keep in mind some tips to increase your chance of getting an SBA loan to buy or start a franchise:

  • Choose a strong franchise.
  • Pick a franchise in line with your professional strengths.
  • Put together a detailed business plan.
  • Fix credit history issues if possible.
  • Consider adding partners with strong net worths or relevant industry experience.

Keep in mind that every lender is different: each likes different franchises and sets different criteria for buyers. A lender will review a number of items from you: personal financial statement, credit report, tax returns, collateral, resume, business plan, and more. From the franchise, a lender will look items such as the franchise disclosure document, training and support provided, historical SBA loan repayment and default rate, and other metrics.

The Pros and Cons of Owning / Buying a Franchise.

Buying or starting a franchise gives you the right to use the franchise business name, brand, process, and product. There are a number of pros and cons of buying and owning a franchise.

The Pros of Buying / Owning a Franchise
  1. You get the name recognition of the brand.
  2. The concept and systems have already been proven.
  3. The franchise provides training and ongoing support.
  4. You get sales and marketing assistance, including point-of sale, local, and national advertising.
  5. The franchisor performs ongoing research and development.
  6. You get access to lower inventory and supplies prices due to the collective buying power of all franchisees
  7. A strong franchise can make getting an SBA loan easier.
  8. You are (basically) your own boss.
  9. It’s less risky than starting your own business.
The Con of Buying / Owning a Franchise
  1. You don’t have complete control as you have to operate within the franchise guidelines. The franchisor may control things such as site approval, appearance standards, goods or services sold, and methods of operation.
  2. The contract can be terminated by the franchisor if you don’t meet all the requirements in the agreement.
  3. The contract is subject to renewal.
  4. A franchise’s reputation as a whole can affect your individual location.
  5. You have to pay the franchisor fees including initial franchise fees, training program fees, advertising fees, and royalty fees.
  6. You have less privacy as you have to share your financial information and there are periodic checks to ensure that you are operating within the required guidelines.
  7. There is possible territory oversaturation as the franchise tries to maximize its locations.
  8. There can be restrictions on ownership transfer rights.
Best and Worst Franchises to Own by Franchise SBA Default and Repayment Rates

Here are the best and worst franchises to own based on franchise SBA default and repayment rates. Other factors to consider when evaluating a franchise include costs and fees, size and growth, support, brand strength, and financial strength.

25 Best Franchises to Own Based on Franchise SBA Repayment Rates for 2000 – 2016
RankFranchiseLoan Repayment Rate (%)
1Straight Shot Express100
2Farmer Boys96
4Comfort Keepers94
6Buffalo Wild Wings91
7Jet’s Pizza91
8Visiting Angels90
9Complete Nutrition90
10Great American Cookies89
11Culligan Soft Water Service89
12Mad Science Group89
13Merlin’s Muffler89
14Christian Brothers Automotive89
15Merry Maids88
16Worldwide Express88
18Fleet Feet Sports86
19Culver’s Frozen Yogurt86
20Cookies by Design85
23Sport Clips84
24Comfort Inn84
25Molly Maid83
25 Worst Franchises to Own Based on Franchise SBA Loan Default Rates for 2000 – 2016
RankFranchiseLoan Default Rate (%)
2Noble Roman Pizza88
3Image Sun Tanning83
424Seven Vending81
5La Paletera76
6Orangetheory Fitness76
7Juice Zone75
8Wireless Toyz72
9Play N Trade72
10Executive Tans72
11Shane’s Rib Shack72
12Country Clutter71
13Camille’s Sidewalk Cafe70
14New York NY Fresh Deli70
15Mr. Transmission68
17Maid-Rite Sandwich Shop68
18Pro Golf of America67
19Pita Pit66
20Johnny Rockets66
22Planet Beach65
23Super Suppers64
24Figaro’s Italian Pizza64
25Bark Yard Burgers64