Securing an SBA Loan for Your Franchise: Key Considerations and Timelines to Keep in Mind
If you're considering buying a franchise, it's important to understand the steps involved in securing an SBA loan and ensure that all necessary details are addressed in a timely manner. Here are some critical factors to consider:
Lease and Landlord Subordination: This is a crucial step in the negotiation process, as the landlord may not have a vested interest in the success of your business. You must secure the lease and landlord subordination agreement early on to avoid delays. Ideally, this should be completed at least three months before the scheduled closing date.
Life Insurance: The SBA requires very specific life insurance coverage, including a specific amount and beneficiary. Obtaining underwriting approval can take several weeks, so you should start the process as soon as possible. Allow at least two months to obtain the necessary coverage.
Seller Note Covenant: If there is a seller note in your deal, the seller will need to sign a seller note covenant with the bank. This covenant states that the seller note is subordinate to the bank loan. The bank may also require additional concessions, so you should get this sorted out at least four months prior to closing.
EIN Letter for Acquisition Entity: The EIN letter is necessary if you form an acquisition entity to acquire the assets or stock of the target business. Some banks accept a screenshot of the EIN assigned online, while others require a printable letter. It's important to obtain the necessary EIN letter at least three months prior to closing.
Foreign Entity Registration: If your acquisition entity is formed in a different state from the target business, you may need to register it as a foreign entity. This process can take several weeks, so you should file early or form the acquisition entity in the target state. Allow at least three months for this process.
Seasoning of Funds: The bank requires proof of where the money has been for the last 60 days. This typically involves providing two months of bank statements. This rule also applies to investors participating in the deal, so it's important to communicate this requirement to them early on. Allow at least one month for this process.
Buying a franchise involves several critical steps that must be completed in a timely manner to secure an SBA loan and ensure the deal closes on time. It's important to start the process early, allowing plenty of time for each step. Consider working with an experienced attorney or advisor who can guide you through the process and ensure that all necessary details are addressed
