Start-Up Financing - Get a SBA Loan for Start-Up, Franchise, or Business Purchase

One of the best ways to obtain start-up financing for a small business is the SBA 7(a) Loan Program. The SBA (Small Business Administration) is a governmental entity whose sole purpose is to support small business in the United States. One of the programs it sponsors is the 7(a) Loan Program which allows new businesses to take advantage of bank financing.

There are 3 ways to use the SBA 7(a) Loan program when looking to finance your first business using a bank loan. We'll cover each and how they relate to the 7(a) loan program.

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The first business approach that can be utilized under the 7(a) program is starting a business from scratch. This means you've created the business idea yourself and you plan on launching your very own business. For this approach you will need to know several things:30% of the Total Cost to start your business will need to come from your personal cash reserves. Your Business Plan will need to be strong because you'll have to convince the bank that even though your idea hasn't been proven yet, you're research and numbers show your confidence that it will work. Keeping the loan amount under $150,000 increases your chances of approval. You'll need to make sure your Income/Expense projections are as reliable as possible. Be prepared to answer several difficult questions from the bank regarding your business concept.

Know that the approval process will be harder when you take this approach to starting your first business, but not impossible. You'll just need to be a lot more thorough than when using the other 2 approaches.

If you plan on buying a Franchise for your first business, getting approved for a 7(a) loan is a little easier. This is because of the support you will receive from the Franchisor. The strongest Franchisors have 2-3 week training programs which go a long way towards helping you build credibility with a bank. In addition, the on-going support from the Franchisor is a great tool to help make your business successful. Here are several things you need to know:30% of the Total Cost to start your Franchise will come from your pocket, just like a start-up. You'll still need a Business Plan, but a lot of the information you'll need will come from the Franchisor. The Franchisor can provide sales results from there franchisees which is very helpful to banks when making a lending decision. You can count the Franchise Fee as part of your cash injection into the business. Banks have pre-approved lists of Franchises they are willing to finance. Find out from the bank if your Franchise is on that list. If it's not, they may still approve a loan for you, but it can take a lot longer because they'll need to go through a special process to approve the Franchisor.

Those are the basics when looking at financing a franchise. Keep in mind the better quality the Franchise, the better the chances you have of getting approved.

Quick Tip: It can be a red flag if your Franchise is not approved by your bank or the bank tells you it is unwilling to finance the Franchise you have selected. 9 times out of 10 the bank has a good reason for not financing that particular Franchise which could include failed Franchises, or weak on-going support from the Franchisor.

Business Purchase
The final way you can use the SBA 7(a) loan is to buy your first business. This is a little easier than a start-up or a Franchise because the business will need to have been operating for more than 2 years and profitable for you to get a bank loan. A business that's been operating profitably has proven results which make banks very comfortable when loaning money to buy them. Again, key points you need to consider:You will only need to come up with 20% of the Total Purchase Price in cash as opposed to 30% with the other 2 options. In almost all cases the bank will require you to pay for an independent valuation of the business. A bank usually will not lend more than 50% for the dollar amount beyond the value of the assets of the business (determined by the valuation), otherwise known as Goodwill (or Blue Sky Equity). The seller can finance a portion of the 20% cash injection you're required to come up with. You will need to obtain the last 3 years of business tax returns and financial statements from the seller.

That's a quick summary of how the SBA 7(a) Loan program can be used for 3 different approaches to starting your first business. If you would like to find out exactly what you need to do to get approved for a SBA 7(a) loan, please visit

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