SBA 7(a) franchise loans in 2008, up 64% from $51 million in 2004. The figure is particularly striking because SBA 7(a) franchise loans, which tend to be working capital loans, were down 20% overall in 2008. Blacks also obtained $13 million in SBA 504 franchise loans, which are for plant and equipment purchases, in 2008, an 88% increase from 2004.
Grady Hedgespeth, director of the SBA’s office of financial assistance, admits that SBA lending fell off about six months after conventional lending slowed. “When you have such tremendous movement in the overall economy, we aren’t immune to that,” he says. “Certainly, whenever we hit bottom and start coming out the other side [of the recession] it’s likely to be led by SBA lending as banks get back into taking on appropriate risks.”
Hedgespeth says that entrepreneurs planning to apply for SBA loans must have solid business plans that have been stress tested and clearly demonstrate how the needed funds will generate revenue to cover debt. They’ll also need to bring more equity to the table and shop around at smaller community banks and credit unions for loans under $100,000. The SBA Franchise Registry, a list of franchises whose franchisees’ SBA loan applications are approved more frequently, will increase in importance as more banks look to it when evaluating franchise concepts.
Marquis Neal obtained an SBA loan to fund his i9 Sports franchise’s $50,000 startup costs but admits “It was tough.” With the help of his wife, Xanthe, who is an accountant, he was able to put together three-year projections, cash flow statements, and a comprehensive business plan. The upfront costs secured business management software, training, initial on-site help, and customized demographic study of the territory. In 2008, his youth sports youth league franchise enrolled more than 800 kids in flag football, cheerleading, and basketball programs in West Baltimore County, Maryland.
Harsh economic times often give birth to enduring companies, and franchises are no exception. “Franchise business leaders have confidence in the entrepreneunrial spirit of their franchises and the fundamentals of the franchise business model,” Shay says. “When you buy a franchise, you purchase a proven system as well as training and marketing support, which may prove advantageous during a slowing economy.”
10 Home-Based Franchises
The Growth Coach
Small Business Coaching
10 til 2
Part-time Job Placement Services
Décor & You
Always Best Care
Small Business Coaching
Youth Sports League
This story originally appeared in the February 2009 issue of Black Enterprise magazine.