The 6 C's the SBA Looks at When Approving Small Business Loans
When pursuing financing for your franchise, understanding what the Small Business Administration (SBA) looks for in a loan application is essential. The SBA uses six key criteria to assess a borrower’s eligibility. Here's a breakdown of what you need to know as a prospective franchise owner:
- Character - Lenders want to feel confident in your ability to run a successful business. They’ll evaluate your credit history, financial track record, and even your business management experience. The better your personal and professional reputation, the stronger your application.
- Capacity - Capacity refers to your ability to repay the loan. Lenders will closely examine your projected cash flow, income, and any existing debt to ensure your franchise will generate enough revenue to cover loan payments. Demonstrating a clear, achievable financial plan is critical here.
- Capital - Lenders prefer to see that you’ve invested your own money into the franchise. Having skin in the game—whether through personal savings, equity, or other funds—shows your commitment to the business and reduces the lender’s risk.
- Collateral - Collateral is a safety net for lenders. It could be property, equipment, or other assets that can be used to secure the loan. While not always required, offering collateral strengthens your application by providing additional security for the lender.
- Conditions - Lenders also take into account external factors such as economic conditions and the overall health of the franchise industry. They’ll want to know how you plan to use the loan—whether it’s for startup costs, expansion, or ongoing operations—and how those plans fit into current market conditions.
- Credit Score - Your credit score is a key component of the SBA’s evaluation. A score of 690 or higher is typically considered favorable, but improving your score before applying can make a big difference in securing the loan.
By understanding and addressing these 6 C’s, you’ll be better prepared to submit a compelling loan application. Whether you're a first-time franchisee or looking to expand your portfolio, knowing what lenders are looking for will give you a significant advantage in securing financing for your business.
