3 Small Business Administration Insurance Programs To Finance Your Franchise

MLM is a simple and easy way to jump right into the business world – finally becoming your own boss.

Additionally, franchises are probably the easiest business to finance because they usually don’t come with as much startup risk (unknown risks) that banks and other commercial lenders tend to shy away from. Since most franchises come with strong brand names, proven profitability, cash flow records, and tend to perform well almost anywhere (globally), these business models have a tendency to travel through the insurance underwriting process and go from application to financing anywhere. Time is fixed.

In fact, the Small Business Administration (SBA), hoping to speed up the funding process and fund more franchise insurances, has created an “SBA Certified Franchise” list — a list of franchises the SBA has already vetted through its underwriting process.

According to Jim D, former broker for the SBA.gov website;

“SBA-approved franchises are select business opportunities whose agreements have been accepted by the SBA. When it comes to securing an SBA-backed insurance, applicants for an approved franchise are easier and faster. Applicants for SBA-accredited franchises benefit. Simplified review process speeds up insurance application Because the particular franchisee is pre-approved, the insurance review is less complex and focuses on specific aspects of that brand’s business plan.”

So, if the Small Business Administration loves perks so much, what insurance programs do they offer?

3 SBA Insurance Programs to Get the Franchise

The most important things first. The SBA does not provide direct insurances to business owners or franchisees. Thus, you should still take your insurance application to a lending bank or SBA financial institution. However, these assets also know that the SBA loves their proven franchise business and they are more than willing to review and process your application.

When seeking an SBA insurance for your franchise, you should focus your specific financing needs and match them with the SBA insurance program as follows:

  1. SBA 7(a) Insurance ProgramThis is the SBA’s flagship program designed to fund nearly all aspects of a business.

According to the Credit Standby Agreement, the 7(a) Insurance Program can be used:

  • To provide long-term working capital to be used to pay operating expenses and accounts payable and/or to purchase inventory

  • Short-term working capital needs, including seasonal financing, contract performance, construction financing and export

  • Revolving funds based on the value of current inventory and receivables, under special conditions

  • To purchase equipment, machinery, furniture, fixtures, supplies or materials

  • To purchase real estate including land and buildings

  • To construct a new building or renovate an existing building

  • To create a new business or assist in the acquisition, operation or expansion of an existing business

  • To refinance existing business debt, under certain conditions

The maximum insurance amount for this program is $5 million with an average, in 2012 – last published figure, it’s about $337,730.

Since most SBA insurances come with longer insurance terms that make monthly payments affordable, real estate insurances can have maturities of up to 25 years, up to ten years for equipment and up to seven years for working capital.

Now, all SBA insurances are supposed to be fully secured by business or personal assets. However, while the SBA expects this, it will not refuse a insurance based on insufficient collateral.

Finally, know that these insurances require the borrower to provide 20% or more as a down payment or their own equity in the transaction. Thus, the SBA will only guarantee 80% of the required amount.

As you should be able to see, this SBA program can cover almost all franchise financing needs from real estate purchases and development to business equipment to working capital needs. Thus, if this is what you need to buy or grow your franchise, start here.

  1. CDC/504 . Insurance ProgramA 504 secondment program, like the 7(a) program, is great for franchisees. However, this program is limited to the purchase of real estate and equipment only.

According to the Saudi Business Federation, the 504 insurance program can be used for;

  • Purchase of land including existing buildings

  • Buy improvements, including grades, street and utility improvements, parking and landscaping

  • Construction of new facilities, modernization, renovation or conversion of existing facilities

But the real benefit of this insurance program is that the portion of the principal or down payment required of the borrower is lower – usually around 10% – and therefore, requires less out-of-pocket.

How does this program work? This program is designed to help facilitate additional business growth and development within areas of the community. Thus, when a 504 insurance is requested and approved, the CDC – the community portion of the insurance – will finance and guarantee up to 40% of the insurance application, and a local SBA approved bank will finance 50% of the insurance application with a 10% left remaining from the borrower. Three partners all working toward the same goal – the long-term success of your franchise.

This program can provide up to $5 million to companies that can and will create jobs in society, and up to $5 million to companies that provide a public benefit such as reduced energy or alternative fuels as well as rural development work, minorities, women, or veterans Export companies and companies – to name a few – these are stated goals that are known to have public benefit and as such the Small Business Administration wants to fund these companies. and up to $4 million for small manufacturing companies that create jobs.

Finally, to make these insurances and the resulting payments affordable—leading to long-term success for the borrower—the SBA will allow for insurance terms of between 10 and 20 years.

  1. SBA Express ProgramThe SBA Express is similar to the younger brother of the SBA 7(a) insurance program with many advantages and limitations.

First, this software offers a quick review process. In fact, the SBA guarantees that your express insurance application will receive a response in less than 36 hours. But, while you may receive a response, this does not mean that you will receive approval. It just means that you will know that the Small Business Administration has received your application and they will usually ask for additional information from you at that time – but at least you know it’s in the works.

Secondly, the maximum insurance amount under this program is only 350 thousand dollars. It’s not a huge amount these days but it might be enough to land the franchise of your dreams – especially when compared to the average insurance amount for a full 7(a) program of about $337,730.

Third, the SBA will only guarantee up to 50% of the insurance amount – which means more of the insurance risk will fall on the bank or lender. However, if your deal is strong enough, that 50% guarantee could be the difference between agreeing and rejecting.

Finally, these insurances only offer insurance terms of up to 7 years and can be used for almost any business capital need.

What is a small project?

Now, to qualify for an SBA insurance, your franchisee must meet the SBA small business definition of:

  • Be for profit.

  • It has up to 500 employees – up to 1,500 for manufacturing.

  • You have less than $21 million in annual receipts — less for some companies or industries.

which suit almost all individual franchisees.

conclusion

Franchising is a great way to enter the business world with a well-known and well-known business model. However, like almost all companies on the planet, financing this franchise to either start it up or grow it remains a difficult hurdle to overcome.

However, as noted and hopefully shown, franchises tend to have more favorable approval rates when using government-guaranteed financing programs such as SBA insurances. Not only does the Small Business Administration look at these types of businesses in an encouraging light, but they also look at banks and other commercial lenders—those other partners who need to get, approve, and fund your SBA insurance.

However, just because your chosen franchise is listed or not on an SBA approved list and your insurance application and use of funds meet these criteria, does not mean that you will be automatically approved. The only way to know if you and your franchise will be approved is to apply. And since you have to apply no matter which option you choose, you can also apply with a financial institution or business funder that already works with the SBA – it can only double your chances of getting the capital you need to realize your full franchise dreams.