When you’re searching for franchise business opportunities, you’ll notice that some of them are “SBA-Approved” franchises. A few of them will also note that the SBA approval isn’t an endorsement from the SBA. So what does this actually mean?
The Small Business Administration, or SBA, is a government entity with the mission of helping small businesses and entrepreneurs get help in three areas: capital, contracts, and counseling. Once you understand the goals of the SBA, it’s a lot easier to understand what an SBA-Approved franchise is.
The first goal of the SBA is capital, including small business loans from the SBA as well as other qualified lenders. Not all lenders are SBA-approved either, just as not all franchisors are SBA-approved. The SBA doesn’t look at all lenders (or franchises) and approve the good ones. Your local regional bank may not be an SBA-approved lender simply because they haven’t sought certification from the SBA. The same goes for franchisors.
What’s more, the SBA is only interested in small businesses, so they check franchise agreements to ensure that franchisees are signing up for a small business, not something larger. A franchise that’s going big may not be eligible for SBA approval, however good they are.
Franchisors that apply for SBA-Approval go through a process that allows for a shorter period for franchisees to receive loan approval. Normally, when you apply for a small business loan, the bank will look over the contracts you’re signing with franchisors to make sure that you can meet the requirements and that you and the franchise will be a good investment.
When you apply for a loan with an SBA-approved franchise, the SBA has already reviewed the franchise agreement and has determined that there are no unacceptable control provisions by the franchisor over its franchisees. Unacceptable control provisions could result in affiliation with a franchisor that is considered to be other than small; that would mean that a franchisee would not be considered to be a small business eligible for SBA financing.
Streamlined loan application processes are great if you’re looking to get your franchise started immediately. It can take a long time for your loans to be approved and cutting down the time can make a big difference in the time it takes you to get up and running.
But the real question is, does that make SBA approved franchises better? No necessarily. Not all franchisors care to go through the process because it costs them time and money. It can take up to 10 weeks for franchisors to receive approval. If they’re in no hurry to find franchisees and want to spend more time finding the perfect fit for their business, they may be less concerned with timeframes of loan approvals. Hiring a lawyer to ensure that your franchise agreement is acceptable and doesn’t create overbearing restrictions on your business may be a more valuable strategy than limiting yourself to SBA-approved franchises.