BUSINESS LOANS
By Frank Mitchell Corso, Small Business Developer

There are many ways to obtain monies for your new or existing franchise. A business loan from a bank or a non-bank is one way of raising the money you need. There exists many different types of business loans. The United States Small Business Administration offers several loan programs available to United States Small Business.

The Small Business Administration 7(a) and Low Documentation Guaranteed Loan programs are loan programs that fit the needs of may franchisees. The Low Documentation Guaranteed Loan program is a derivative of the SBA 7(a) Guaranteed Loan program. This program is about two years old.

The 7(a) and Low Documentation programs are guaranteed lending programs of the Federal Agency, Small Business Administration. A lender, approved by the government, lends the money to the small business. The government will guarantee eighty percent of the low documentation loan and seventy to ninety percent of the 7(a) depending on the use of proceeds and strength and weakness of the potential borrower. These lenders can be a bank or a non-bank. The lender may be a small regional bank or a national lender.

An existing or start up franchisee is eligible to submit his or her loan request to a participating lender. To have the best opportunity to secure a business loan the franchisee must prepare and submit a business plan along with several documents to give the lender and the SBA enough information to make an intelligent decision on repayment ability and methodology of payback. The business plan and supporting documents are very important to the lender and SBA. Your plan is your selling tool to convince the lender and SBA to give you the money. You do not get a second chance to make a first impression. The plan, documents and properly completed SBA & Bank Forms is their first impression of you.

The business plan is a detailed narrative of the business, its principals, the franchise, the competition, the industry, et al. The additional portions of the business plan and loan package would be demographics, marketing materials and strategies, descriptions of the job, functions of the principals and employees, resumes of the owners and key employees, one to three year cash flow projections, personal tax returns on owners of 20% or more of the business, business tax returns, accounts payable, accounts receivable, balance sheet, financial statements, personal financial statements on all principals who own twenty percent or more of the business, business lease, insurance, franchise agreement, Uniform Franchise Offering Circular, Collateral to be offered for the loan, etc.

It must be explained in the use of proceeds; what you need the money for, i.e. working capital, inventory, renovations or construction, franchise fee, business equipment, advertising/promotions, pay off business debt, etc.

All loans are to be adequately secured by collateral. The collateral may be business equipment and/or real estate. Not having real estate will not disqualify you from obtaining a loan. Many lenders who participate in the Low Documentation Loan program do not want real estate as collateral because they must liquidate the collateral before they can turn to the SBA for reimbursement.

For loans of less than seven years the interest rate can be up to 2.25 percent over prime and for loans over seven years or longer can be up to 2.75 percent over prime. It can be fixed or a floating rate. Generally the lenders prefer offering a floating rate.

Most of the time the owners will have to personally sign for the loan together with the business.

You must demonstrate the ability to repay the loan to the lender and SBA together with the methodology of payback. This is a brief overview of the Small Business Association's 7(a) and Low Documentation Guaranteed loan programs.