Government Financing Programs for Franchises

The Small Business Administration offers numerous loan programs to assist small businesses. It is primarily a guarantor, not a lender, of loans made by private and other institutions. Federal appropriations allow the SBA to provide guarantees on loans under specific programs.

With an SBA

loan guaranty, independent lenders (banks, community development organizations and microlending institutions, etc.) lend you money and, in turn, receive the full faith and credit backing of the federal government on a portion of the loan they make to small businesses. The loan guaranty that the SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to the SBA.

The SBA administers three separate loan programs: Basic 7(a) Loan Guaranty, 504 Loan Program and 7(m) Loan Program (Microloan).

The Basic 7(a) Loan Guaranty Program is the SBA's primary business loan program, which helps qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Financing under this program can be guaranteed for a variety of general business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. 

The Certified Development Company (CDC), 504 Loan Program provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. 504 funding typically includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture, which is an unsecured bond backed only by the credit standing of the issuer) with a junior lien covering up to 40 percent of the total cost and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases).  

The Microloan, 7(m) Loan Program provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who, in turn, makes the microloan to the applicant. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states.  

Take a look at the AllBusiness.com Practical Guide to SBA Loans. Also read "Financial Questions to Ask Yourself Before Buying a Franchise."