Can I get an SBA 7a Loan For A Startup?

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So you want to start a business from scratch? I have good news and bad news.  While technically banks can fund a startup, in my experience, most lenders will only be interested in approving an SBA 7a loan for franchises.  Why?  The answer is pretty simple.  If they have had success with other franchisees for a particular franchise, they can better forecast how a new location with will do.  For example, if someone opens a Jason’s Sub Shop franchise, and the bank has given 50 SBA 7a loans to other franchisees, and all have been successful, they will be able to rely on the past success of other to predict the success of future Jason’s Sub Shops.

Contrast the above with a non-franchise startup, whether it be a restaurant, a retail shop, some other type of startup.  Startups have notoriously high failure rates, and in case you were unaware, banks don’t particularly enjoy losing money!  And since startups have no operating history, it’s really hard to predict how a new business is going to perform from a financial standpoint.  Some lenders can overcome this sort of situation by taking enough collateral to ensure that i your business does fail, the sale (also known as liquidation) of those assets will get them their money back.  While some lenders will approve these sorts of loans, they usually can’t be done via the SBA 7a program because the SBA makes it very clear that loans should only be made when the lender believes that the business has sufficient cash flow to repay the loan.  They even go out of their way to make it clear that a lack of cash flow cannot be overcome simply by taking an abundance of collateral.

When I was an SBA loan underwriter, our salespeople would try to form relationships with certain franchises were fast growing, and had a track record of success.  Franchises would often come to our offices to meet with management in hopes of convincing the head honchos that their franchise was worthy.  It’s a little known part of the franchise model, but franchises cultivating lender relationships is a big part of what they do.  Why?  Because if a franchise wants to grow fast and add lots of franchisees, they need to have a reliable source of financing for their franchisees.  Once a bank gets on board, it can help a brand really take off.  And the more franchisees that a bank funds with success (i.e. they repay their loans), the more they are willing to fund.

On the flip side, a struggling franchise can really hurt a bank.  I remember there was one particular franchise that started failing left and right, leading the bank (or actually, the SBA since they guaranteed 75% of the loan amount) to lose a ton a money.  Eventually, the bank stopped lending to the franchise.  Considering that we must have financed 20 to 30 of them, I would imagine that losing their primary lender must have put a pretty significant dent in their growth.

So if you are planning on starting a business and want to finance it with an SBA 7a loan, know that unless you are going with a franchise, the odds of getting approval will be low.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

 

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