As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
As a franchisee, you’re a small business owner—and like small business owners across the country, your franchise may be experiencing economic hardship as a result of the coronavirus.
But when it comes to securing disaster funding, what are the options for franchise businesses?
Are franchises eligible for traditional SBA loans?
The U.S. Small Business Administration does provide lending opportunities and financial assistance to many franchises—but not all franchises meet the eligibility requirements for traditional SBA loans.
In order to qualify for an SBA loan, franchises must be a for-profit business based in the United States. There are also a number of business categories that are ineligible for SBA loans, including:
- Life insurance
- Private clubs or businesses that limit membership on criteria other than capacity
- Speculative businesses
- Political or lobbying-based businesses
If your franchise falls under one of these categories, you won’t be eligible for a traditional SBA loan.
If your franchise is in an approved category, that doesn’t necessarily mean you’re eligible for an SBA loan. In order to qualify for SBA funding, your franchise must also be listed in the SBA Franchise Directory on sba.gov (as of 2018, the directory featured over 2500 eligible brands).
So, the big question is—if your franchise isn’t eligible for a traditional SBA loan, does that also apply to disaster funding in the wake of the coronavirus?
Are franchises eligible for disaster relief through the SBA?
Small business owners can apply for disaster relief through a few different SBA assistance programs—namely, the Paycheck Protection Program (which was passed as part of the CARES Act legislation in late March) and the Economic Injury Disaster Loan (EIDL).
Let’s start with PPP loans. Franchises are eligible if their business/franchisor is listed in the SBA Franchise Directory and they meet the eligibility requirement for a Paycheck Protection Program loan, including:
- Less than 500 employees per franchise location;
- Your franchise was operational on February 15, 2020
- All franchisees with a 20 percent or higher stake in the business are US citizens or permanent residents
- All franchisees have no criminal record over the past seven years
- The franchise and/or franchise small business owners are not delinquent on any SBA loan or other federal loan and haven’t defaulted on any such loans in the past seven years
- You are not currently in bankruptcy proceedings
If you qualify and are approved for a PPP loan, up to 100 percent of the loan is forgivable if used to cover payroll costs and other approved business expenses in the eight-week period following loan origination, including rent, mortgage interest, and utilities. (Just keep in mind that in order for your PPP loan to qualify for forgiveness, 75 percent needs to be spent on payroll costs.)
An Economic Injury Disaster Loan (EIDL) is another option for franchisees. Again, you’ll need to be listed in the SBA Franchise Directory in order to be eligible—and, like PPP loans, you’ll need to have fewer than 500 employees at your franchise location. (The operation date to qualify for an EIDL loan is slightly earlier at January 31, 2020). Unlike PPP loans, SBA Economic Injury Disaster Loans are not forgivable—but they do offer a 3.75 percent interest rate and a term duration of up to 30 years, which is a more generous package than most traditional small business loans. The EIDL loan program also offers a loan advance feature, which allows you to apply for an advance of up to $10,000 if you need cash in hand quickly.
The Paycheck Protection Program and Economic Injury Disaster Loan Program are both excellent options for disaster assistance. But again, not all franchises are eligible—and even if you do qualify, there’s no guarantee you’ll receive funding. Competition for these loans have been unprecedented, and many businesses owners who have submitted applications have yet to get their loans approved or receive any funding.
So, what should you do if you can’t secure an SBA disaster loan to support your franchise as you try to move your franchise forward in the midst of the coronavirus pandemic?
If your franchise needs additional funding, what are your options?
Luckily, SBA loans aren’t your only option if you need disaster funding to support your franchise through the COVID-19 crisis. There are additional lending options you can pursue to help you get the funds you need to keep your business afloat until the world is past this crisis on moving back towards economic security.
Some alternative lending options you make want to explore to help carry your franchise through the coronavirus pandemic include:
Bridge loans are short-term loans that offer immediate cash flow to businesses. They’re meant to “bridge” a financial gap—and to get your business through a temporary lack of cash flow.
Bridge loans offer some definite benefits. Because they’re designed for immediate cash flow needs, the loan approval process is fast—and funds are delivered quickly. But bridge loans also have higher interest rates, short repayment terms, and additional fees. They also may require collateral in order to secure the loan (like real estate).
If you feel confident you’ll be driving revenue soon—and will be able to pay your bridge loan back according to your repayment terms (typically, payback terms last up to a year), this could be an emergency lending option to explore.
Working capital loans
Working capital loans are loans meant to finance a business’ day-to-day operations—or, in other words, to get them the working capital they need to keep their business moving forward.
You can use working capital loans to finance everything from payroll costs to rent to debt repayment—and while working capital loans aren’t always used to fund business operations during a disaster, they certainly can be.
Some working capital loans require collateral (although borrowers with higher credit scores may be able to get an unsecured working capital loan where collateral isn’t required) and often have a high interest rate (especially when compared to low-interest loans like EIDL or PPP loans). It’s also important to note that, even though working capital loans are business loans, many are tied to the borrower’s personal credit—so if you default on your loan, it can have a negative impact on your credit score.
Business credit cards
If you have excellent credit, you may be able to qualify for a business credit card with a 0 percent introductory APR rate. While you can’t use a business credit card for all the costs associated with your business, it could help float certain expenses—and if you can repay the balance before the introductory term expires (typically anywhere between 12 and 21 months), you won’t pay any interest.
Get the funding you need for your franchise
Again, franchisees are small business owners—and, just like other small business owners, many need disaster funding to make it through the coronavirus crisis. And now that you understand the SBA’s disaster assistance programs, eligibility requirements, and alternative lending options, you’re armed with the information you need to start taking the steps necessary to get the funding you need for your franchise.