How to finance a franchise: every option compared

Very few people buy a franchise entirely with cash. The usual structure is a cash injection from the buyer — often 20–30% of the total project — with the rest financed. The right mix depends on the project size, whether real estate is involved, your credit and collateral, and how much risk you are willing to put on your home or retirement savings.

What lenders look at first

• Equity injection. Cash you put in. Under the SBA's current rules a start-up must inject at least 10% of the total project, and most lenders financing new franchises want 20–30% in practice.
• Credit. Personal credit history and score; many franchise lenders look for scores in the high 600s or better.
• Experience. Management or industry experience that suggests you can run the business.
• Cash flow. Projections showing the business can cover its debt payments with room to spare, often expressed as a debt-service coverage ratio of at least 1.15x to 1.25x.
• Collateral and guarantees. Business assets, and often a personal guarantee and a lien on personal real estate where available.
• The brand. Lenders prefer franchise systems with low closure rates and solid Item 19 data. For SBA loans in the US, the brand should appear on the SBA Franchise Directory.

SBA 7(a) loans

The 7(a) program is the most common route for US franchise buyers. Banks and non-bank lenders make the loan and the Small Business Administration guarantees a portion of it, which lets lenders accept start-ups they would otherwise decline. Key features:

• Maximum loan amount of $5 million.
• Terms up to 10 years for working capital, equipment and business acquisition, and up to 25 years when real estate is included.
• Interest rates pegged to a base rate (usually prime) plus a spread that the SBA caps; smaller loans may carry higher maximum spreads.
• Guarantee fees and packaging costs, which vary by loan size.

The SBA reinstated its Franchise Directory with Standard Operating Procedure 50 10 8 (effective June 1, 2025). Lenders use it to confirm that a brand's agreements meet SBA eligibility rules. An updated procedure, SOP 50 10 8.1, applies to loan applications that receive an SBA loan number on or after October 1, 2026, with tighter rules for change-of-ownership deals such as buying an existing franchise unit. Ask your lender which version applies to you.

Use our SBA loan payment calculator to estimate payments and the cash flow needed to pass coverage tests.

SBA 504 loans

The 504 program finances major fixed assets: buying or building real estate and long-life equipment. A typical structure is about 50% from a bank, about 40% from a Certified Development Company backed by the SBA, and 10% from you — rising to 15% for start-ups or special-purpose buildings. It suits franchises such as car washes, hotels, child care centres or owner-occupied restaurants where the building is a large part of the cost. Rates on the CDC portion are fixed for long terms.

Rollovers as business start-ups (ROBS)

A ROBS lets you use retirement savings — typically a 401(k) or IRA — to fund a business without paying early-withdrawal taxes and penalties. You form a C corporation, it sponsors a new retirement plan, your existing funds roll into that plan, and the plan buys stock in your company. The business receives the cash.

The advantages: no loan payments, and it can serve as the equity injection for an SBA loan. The risks: you put retirement savings into a single business, setup and ongoing administration fees apply, and the structure must be maintained correctly under IRS and Department of Labor rules. Work only with experienced providers and your own tax adviser.

Home equity

A home-equity loan or line of credit (HELOC) often has a lower rate than unsecured business credit and can be arranged quickly. The obvious cost is risk to your home if the business struggles. Many buyers use home equity as part of the cash injection rather than the main financing.

Franchisor financing

Some franchisors finance part of the franchise fee, equipment or build-out, or have relationships with preferred lenders. Item 10 of the FDD must describe any financing the franchisor or its affiliates offer. Compare the effective rate and the default terms with outside options; franchisor financing sometimes allows the franchisor to terminate the franchise agreement if you miss a loan payment.

Equipment financing and leasing

For equipment-heavy concepts — fitness, food, auto services, restoration — equipment loans or leases spread the cost over the equipment's useful life and are secured by the equipment itself. Leases can preserve cash for working capital, but compare the total of payments with the purchase price.

Partners and investors

A business partner or private investor can supply cash, credit strength or experience. Put everything in writing: ownership percentages, who works in the business, how profits are distributed, and how either side can exit. Franchisors will usually require every owner above a certain percentage to sign a personal guarantee.

Outside the United States

Canada: the federal Canada Small Business Financing Program shares risk with participating lenders on loans for equipment, leasehold improvements and certain working capital, and major Canadian banks run franchise lending programs for established brands. United Kingdom: several high-street banks have franchise teams that will often lend a larger share of start-up costs for established, accredited brands than for independent start-ups. Australia: the big banks offer franchise finance programs, generally favouring brands with a track record. Check current program limits with the lender, as they change.

Comparing your options