Should high interest rates stop my SBA Franchise loan from a start-up investment?

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Don Johnson

Don Johnson

Don Johnson has over 25 years of business ownership experience having owned and sold two successful businesses. Don has been involved in business and franchise lending for over 20 years as an owner of Diamond Financial Services (New Jersey office) as well as Principal and Director of Business Development for A. B. Nicholas, LLC, a specialty lending firm.

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The simple answer is no!
Here are the top 8 reasons why.

  1. On a typical size $300K SBA 7(a) loan with a $4,048 monthly Loan Payment for 10 years at 50% rate, you would be paying $340.00 more per month compared to a 6.50% rate. This would be additional loan debt service of $642.00 per month or a total of $7,040 for the year.  With a new business or expansion to a new location, every dollar does count, and it is imperative to keep monthly overhead as low as possible, but if your first few year’s sales are $250K, $375K and $480K with a profit and salary of $63K, 109K & 140K+ should you not proceed because of a relatively higher debt service amount? You have to look at the “Big Picture” with Business.  Don’t let interest rates intimidate you or allow it for you to not reach your goals.  So the cost of franchise financing is higher, it is simply the cost of doing business and is not nearly as bad as you think when you annualize all the numbers.
  1. Interest rates will always be going up and down. SBA 7 (a) rates vary and can never go higher than 2.75% above prime, so you will always have some protection.  Do not let a good business opportunity pass you by simply because rates are currently higher now.  The Banks obviously want you to succeed.

  2. You can refinance onto a lower fixed rate with your lender at some point later on, so the high interest rate may only be over a short period of time. Just as rates went up quickly, they can just as easily go back down just as fast.

  3. To offset the higher interest rate (and higher overhead) with your new franchise business, look to see if other expenses can be cut (marketing, insurance, travel, utilities, etc.) without hurting your business plan and bottom line first year goals. You should always be on top of your overheard anyway, with lowering them always a strong possibility.  It will indirectly force you to always be on top of your numbers, which is a great thing!

  4. As a longtime business owner of 30 years, you will always be battling something in the business world, whether it new competition, Pandemic, the Great Recession, the Economy, higher costs that are out of your control, it is never easy, so a higher interest rate for your business is your battle and what is happening now. You will fight to overcome it and be a better, more experienced entrepreneur.

  5. You may be able to find a non-SBA lower rate conventional bank for your franchise business loan. I feel that SBA 7(a) loans offer the best overall business loan product (longer term, more working capital, less personal collateral) but non-SBA can have a lower fixed rate but is tougher to find. An experienced Franchise loan broker can help you find the right franchise financing.

  6. I’ve talked to many entrepreneurs over the years who literally do not care about the current rate and don’t let that affect them at all or cause them to not start-up, expand or to buy a business. They are self-confident in their business products and services, business plan, and view higher interest rates as only making a little less profit now.  It doesn’t weigh into their decision. They know more profits will come later on.  Their proforma projections are too strong and they know they can pay down the loan quickly. Believe me, It is best to think like them!

  7. Most lenders have no pre-payment penalties on a 10 year or less loan term (SBA 7(a) is the rule), so paying a higher rate early on can be offset later on down the line with your new business if your franchise business loan is paid off earlier, or you can even refinance after 3-5 years as another option to lower loan debt/overhead, as we mentioned earlier.

We hope these 8 Main Reasons will help you to make your best decision and be a more informed and better business owner.

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