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Entrepreneurs Open Franchise With SBA 7(a) Loan, Thrive During Pandemic

July 19, 2021 / by Mike Slater

We love highlighting the positive impact of SBA loans for small businesses, lenders, and local communities. During the pandemic, the economic conditions caused credit markets to tighten, which made it more difficult for small businesses to get a loan. In this case study, the enhanced SBA 7(a) loan guarantees helped offset additional risks and gave two young entrepreneurs a strong start when opening a new franchise.

Entrepreneurs Turn an Obstacle into Business Opportunity

 

When two young and entrepreneurial-minded people found themselves furloughed during the pandemic, they turned what others might perceive as a setback into an exciting new opportunity.


Both had dreamed about starting a business for quite some time. They studied entrepreneurship in college and aggressively paid down student debt afterward to be more financially prepared for a future opportunity. When they found themselves unexpectedly laid off, they decided this was their moment. But, the economic conditions for starting a business were uncertain, to say the least, and made the prospect of financing tricky.

 

Franchise Opportunity and Start-up Financing

 

As the young entrepreneurs researched business opportunities, they determined that opening a concrete coatings franchise business was a good option. As new business owners, a franchise would provide a template and resources for success.


But, turning the dream into reality would require capital. They needed a loan to rent business space, invest in equipment and an inventory of supplies, and to cover startup expenses and payroll for employees. This amounted to around $150,000, and they had only a fraction of the collateral to secure a loan this size. Based on the amount of collateral available, they couldn’t obtain much more than $50,000 through a conventional business loan. They would need to come up with the remainder on their own.


But, they learned about Small Business Administration loans after networking with other entrepreneurs. An SBA 7(a) loan would provide a lender with a loan guarantee that would compensate for the lack of collateral, allowing them to obtain the full loan amount they needed with a much lower equity injection of 10%. As part of the SBA’s COVID relief efforts, they were eligible for six months of payment relief that was nontaxable, and the standard SBA fees were waived.

 

Enhanced Benefits for Lenders

 

Until Sept. 30, 2021, the SBA increased its loan guarantees to 90% to help banks continue making loans to small businesses during the economic uncertainty. This is an attractive benefit for lenders because the loan guarantee can be sold on the secondary market.  The premium generates a significant amount of noninterest income, increasing the bank’s liquidity and enabling it to make more loans.

 

For more information about how much noninterest income an SBA 7(a) loan can generate in 2021,
we’ve done the math in
three SBA 7(a) loan examples.

 

Choosing a Community Bank and Doing Good in the Community

 

After interviewing many potential lenders, including the “big four” national banks, the entrepreneurs decided that working with one of VITAL’s community banks was the stand-out choice. They felt they were getting the best of both worlds: a service-oriented community bank and knowledgeable SBA loan experts.


They successfully launched their concrete coatings company, committing to pay their employees fair wages and to partner with other local small businesses whenever possible. Their business has been very well-received, and they have found new professional purpose and freedom in business ownership. The community lender is proud to have reinforced its reputation as a small business supporter and has received a strong testimonial endorsement from the borrowers in the local business community.

 

View other case studies here, or learn more about our comprehensive SBA loan services.

 

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