Forums: Discussions for entrepreneurs and small business.

My husband and I are looking to start a franchise business.  We have thoroughly researched the franchise, applied and have been approved.  We are very excited to move forward with our new business.

 

We were approved because of our business experience, our excellent credit scores, and low debt to income ratio.  However, we are weak financially and do not have the 20-50% injection that the SBA is looking for to give us a loan for our business.

 

Do you have any advice on how to secure that money?  We were thinking we should try and find an investor that would perhaps give us a year or so to get our business up and running before starting re-payment.

 

We know we could go out and get a loan or line of credit for what we need, which is approximately $40,000, but we are concerned about having to repay a loan so quickly with our business just getting off the ground.

 

Thank you for any advice you may have.

To my knowledge, the 20-50% equity injection requirement you mention is not an SBA requirement and is more likely a requirement of the lender.  In fact for dollar amounts less than $150 thousand, an SBA lender may be able to be more flexible on lack of collateral provided you show good cash flow projections. 

 

That being said, if you`re concerned about "having to repay a loan so quickly with our business just getting off the ground", it suggests you don`t have confidence in your cash flow projections.  If you`re not borrowing money to pay yourself a salary, your projections should show sufficient cash flow to service debt within the first 60-90 days.  If your numbers don`t look good, I can understand if a bank insists on a higher equity injection. 

 

First, check the Franchise Registry and confirm that your franchise is on the list of those eligible for SBA loans. 

Then, do a little digging and find an SBA lender that is more flexible on the amount of capital injection. 

 

Good luck! 

Thank you, Mr. Lebovits.  This information is very helpful and clarifies a few things I didn`t understand.

 

This is a first time venture for us, so we do certainly fear the "what if" situation. 

 

Thank you again, and I will definitely do some research on SBA lenders.

 

Marshall is right it is the lender that wants that equity injection. The SBA does not lend money it just insures the loans for the bank. I have always had better luck with credit unions. After you have checked out the Franchise Registry as Marshall suggested I would hope you will call some 5 or 10 of the people that have all ready bought that franchise. Ask all the questions you can, explain your financial position and ask if the business can support its costs. I have found that many people buy a business and find out they have just purchased a mediocre job for the next ten years.

Winston