How To Get a Loan for a Franchise

Secure the funding you need to launch your business venture

When Does a Business Start?
Photo: AZarubaika/Getty Images

Ready to ditch your boring 9-to-5 job to become a small business owner? Then buying a franchise might provide the opportunity of your dreams. Owning a franchise enables you to sell products produced by a larger company, often well-established goods already popular with consumers.

Franchise agreements require franchisees to pay certain costs, like advertising fees, a franchise fee, and royalties. While such costs might seem daunting, financing for franchises is available through commercial lenders, franchise financing companies, and the U.S. Small Business Administration (SBA). Some franchisors also offer special arrangements, such as waiving franchising fees for a specific period, to help fledgling franchisees get started.

Key Takeaways

  • Commercial lenders, the SBA, and some franchisors offer funding to buy a franchise.
  • Some SBA loans provide funding up to $5 million for a franchise.
  • To qualify for a franchise loan, you must meet credit and collateral requirements.

How Much Can I Borrow for a Franchise?

The loan limits of commercial loans can vary by lender. Loans backed by the SBA must follow SBA guidelines. For example, SBA’s popular 7(a) loans offer funding up to $5 million. SBA Express loans provide funding up to $350,000, while SBA Export Express loans max out at $500,000.

Where To Get a Loan for a Franchise

Finding financing for your new venture can be a headache. However, funding options exist, specifically designed for franchisees.

The Franchisor

Some franchisors will help new franchisees start their business by financing a portion of the franchising fee. The franchisors can also partner with lenders such as commercial banks to help new franchisees raise capital to start their business.

If a company agrees to fund its new business partners, it usually indicates this on its official website and on chapter 10 of its franchise disclosure document or agreement.

Note

Compare the franchisor's financing terms with other financing sources before deciding which is right for you.

Franchise Financing Company

Several companies specialize in funding new franchisees. These companies usually match the borrowers with the perfect lenders for their financial need. They may also lend directly to new businesses.

Business Loans From Banks or Credit Unions

You can arrange to borrow from commercial banks or credit unions, such as Bank of America. As with other types of loans, the lender must review your net worth and credit history to determine your creditworthiness. In some cases, you may also have to provide collateral to secure your business loan.

SBA Loans

Through participating lenders, the SBA offers loans up to $5 million. The most common type of loan made to new businesses is the 7(a) loan. The 7(a) loan program offers funding for equipment, inventory, working capital, or to buy real estate. 7(a) loans offer interest rates between 2.25% and 4.75%, depending on the loan amount and maturity period.

Note

The SBA website features a lender matching tool. After answering a few questions, the SBA will match you with a participating lender, typically within two days.

How To Qualify for a Franchise Loan

Before buying a franchise, develop a strategy that will enable you to access financing. Here are a few tips that can help you qualify for a loan.

Determine the Collateral Required

Collateral requirements for loans offered by commercial lenders may vary by lender. SBA 7(a) loans do not require collateral for loans less than $25,000. For loans over $25,000, the lender must follow the collateral guidelines they’ve established for non-SBA business loans.

For collateralized SBA loans, the lender must take a first lien on the assets they finance and then on the borrower’s fixed assets, such as real estate. However, if the borrower’s real estate equity is below 25%, the lender doesn’t have to take a lien.

Check Whether Your Target Franchise Is SBA Approved

Choose a franchise already registered and approved by the SBA. Once a franchise obtains SBA registration, individual franchisees typically do not need to seek additional SBA approval.

This makes a difference because it simplifies the loan application process. Loan applications from franchises that already exist in the SBA registry typically receive faster approval because the SBA already has the required information for an evaluation.

Borrowing for a B2B Company

If you own a business-to-business (B2B) franchise, you can use your clients' invoices to obtain financing from lenders. You can obtain cash advances using your clients’ invoices, a practice called “factoring.” The factor company takes the role of collecting the full amount owed to you by your client, then deducts the amount advanced to you, and any other fees, finally paying you the balance.

Lenders That Pay Your Suppliers

Instead of getting a general loan, you can ask your lender for financing that pays your suppliers first, rather than just giving you a lump sum of money to use for any purpose. This type of financing is known as “purchase order financing” and it enables you to fulfill orders while growing your business.

Bank on a Good Reputation

Buying a franchise from a highly reputable business might improve your ability to get financing. Many lenders have short-listed franchise businesses that have good repayment histories. You can also ask your franchisor to introduce you to lenders that are likely to accept your loan application.

Franchisors Who Facilitate Lending

Some franchisors help their franchisees with access to loans, typically in one of two ways. The franchisor may have a department that guides the franchisees through the loan process, or it may have partnered with loan brokers who will help franchisees access funding.

Frequently Asked Questions (FAQs)

Can I get an SBA loan for a franchise?

Yes, the SBA offers loans for people who want to start a franchise small business. You can apply for an SBA 7(a) Loan to get up to $5 million for a franchise.

Do banks give loans for a franchise?

Yes, most banks offer business loans for people who want to start a franchise business. You’ll need to apply and qualify for the loan, which may be based on your net worth, credit history, and more.

Updated by
Michael Evans
Head shot of Michael Evans
Michael Evans has written about insurance for over two decades. His work has been featured in Bankrate, Fox Business, International Living, and Yahoo! Finance, among others. In addition to finance writing, Michael is the author of "Escape to Colombia" and is an accomplished professional photographer.
Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Small Business Administration. “Terms, Conditions, and Eligibility.”

  2. The Educated Franchisee. “Sample Franchise Disclosure Document.”

  3. Bank of America. “Franchise Financing.”

  4. U.S. Small Business Administration. “Lender Match Connects You to Lenders.”

  5. U.S. Small Business Administration. “Types of 7(a) Loans.”

  6. Washington State Office of Minority and Women’s Business Enterprises. “Invoice Factoring or Accounts Receivable Factoring.”

  7. Washington State Office of Minority and Women’s Business Enterprises. “Purchase Order Financing.”

  8.  Bank of America. “What You Need To Apply and Qualify for a Business Loan.”

Related Articles