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Get Your Franchise Loans Considering Pros & Cons of Financing Options

Date modified: October 2, 2023
Franchise loans can help aspiring entrepreneurs fund their goals and bolster growth. Let's review all the options, terms, and restrictions of applying for various types of franchise funding.
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Starting a franchise business combines the allure of entrepreneurship with the security of a proven-successful business model. Given that there are more than 750,000 franchise operations throughout the United States, it's evident that the business model is effective. However, it's no secret that the journey often begins with a hefty price tag. That's where franchise business loans come in. 

Unlike traditional loans, these are customized to meet the initial setup costs, ongoing fees, and even the working capital needs specific to franchise businesses.

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But how do they work, and how can a new business owner determine which loan is right for them? 

Let’s explore your franchise financing options from SBA 7(a) loans to conventional bank loans and franchisor financing. 

What is Franchise Funding, and How Does it Work?

Have you ever dreamt of owning a slice of a big brand name? That's where franchise funding steps in. At its core, franchise funding is a specialized financial solution designed exclusively for aspiring franchisees. 

Instead of starting from scratch, you're buying into a tried-and-tested business model – and these loans help cover the costs. From the initial franchise fee to inventory, equipment, and sometimes even working capital, the right funding can carry a substantial chunk of your startup expenses. 

Wooden blocks with stores drawn on. One block is redThe process? It starts with identifying a lender – a bank, credit union, or specialized franchise financier. Then, prepare a compelling application showcasing your business acumen, financial stability, and passion for the brand. Secure the funds, and you're one step closer to turning those entrepreneurial dreams into daily realities.

Franchise Funding Options 

There is no one-size-fits-all solution to franchise funding. There are many funding options to choose from, so it is best to do your research before jumping into any loan. Let’s review some popular methods of obtaining funding for a franchise.

SBA Loans

The SBA is a government agency specifically designed to support budding entrepreneurs. The SBA doesn’t lend money directly. Instead, they work with banks, credit unions, and other lenders to offer small business owners and franchisees loans. What's special is that the SBA guarantees a portion of these loans. If you fail to pay back the loan, the SBA promises to cover a part of the amount.

The loans follow a similar path to the traditional lending system but have lower interest rates than other types of loans, starting as low as 3%.

This is because the SBA guarantees a certain portion of the loan (up to 85% for loans up to $150,000 and 75% for loans more than $150,000). That guarantee means less risk for the lender, which translates to a lower interest rate for you. SBA 7(a) loans carry a maximum loan amount of $5 million with no minimum. The loan term can be up to 25 years. 

One of the major disadvantages of these franchise loans is that your provider may require you to pledge collateral. For SBA 7(a) financing, the value of the collateral doesn’t have to equal the value of the loan as long as you pledge all of your available business and personal assets as collateral. High collateral is good for your odds of approval but also means you could lose everything if you default. 

Franchisor Financing

Franchisor funding is when the company offering the franchise lends directly to you – the franchisee. Instead of getting a loan from a bank or another third party, you're borrowing directly from the franchise brand.

Franchisee and franchisor shaking hands over financing contractTypically, franchisors might fund anywhere from $50,000 to $500,000. However, the exact amount varies depending on the franchise and your needs. Loan durations often range between five to 10 years, mirroring the terms you might find in traditional financing avenues. Interest rates can span from 5% to 15%, but the rates are contingent upon the franchisor, the state of the economy, and your financial standing. 

Franchisors generally seek potential franchisees with a strong credit history, prior business experience, and a solid business plan. Financial readiness is also key, as individuals must have enough liquidity to cover initial costs. It's crucial to note that funds from franchisor financing are usually restricted to franchise-related expenses like inventory, setup, and fees rather than personal or unrelated business use.


  • Straightforward Application Process: Since you're dealing directly with the franchisor, there may be less red tape than with external lenders.
  • Aligned Interests: The franchisor has a vested interest in your success, potentially translating to more flexible terms.
  • Familiarity: They know their business model best and can offer insights tailored to the brand you're buying into.


  • Potential for Higher Interest: Sometimes, franchisor funding can come with higher interest rates than traditional lenders.
  • Less Independence: Borrowing from your franchisor might mean adhering more strictly to their terms, potentially reducing your autonomy.
  • Limited Scope: The funds provided typically must be used solely to set up and run the franchise. This means you might not have the flexibility to use them for other ventures or needs.

Commercial Bank Loans

Commercial bank loans are a form of traditional business loans that often feature loan amounts ranging from tens of thousands to millions of dollars. Terms typically span five to 10 years, with interest rates varying based on current market conditions and your credit profile. Generally, rates fall within a range of 4% to 10%.

Lenders typically dive into your business plan, evaluate your cash flow projections, and may require collateral such as real estate or equipment. A robust business plan and solid financial standing can speed up the approval process and grant you more favorable repayment terms.


  • Higher Loan Amounts: Commercial bank loans often offer higher loan amounts, making them suitable for large-sum business needs.

  • Flexible Terms: With terms ranging from five to 10 years, borrowers have more of a repayment cushion.

  • Variable Interest Rates: Interest rates can vary between 4% and 10%, potentially offering lower rates if market conditions and your credit profile are favorable.


  • Stricter Requirements: Specific usage limitations can limit flexibility and make adapting to unexpected business needs or opportunities difficult.
  • Collateral Required: Commercial bank loans often require collateral like real estate or equipment, putting your assets at risk if you default on the loan.

  • Longer Approval Process: Due to the thorough evaluation of your business plan and financials, the approval process might take longer than other types of loans.

Franchise Equipment Financing

Equipment financing helps franchisees purchase new commercial equipment, ranging from electronics and vehicles to heavy machinery. It's important to note that this funding is allocated explicitly for acquiring fixed assets. 

Lined up forklifts in warehouseFinancing can range from a few thousand dollars to upwards of a million, depending on the equipment's cost and your business's needs. Terms typically vary between two and seven years. Interest rates can range from as low as 4% to as high as 20%, depending on various factors like creditworthiness and market conditions.

Lenders often scrutinize cash flow, operational history, and even the equipment's potential return on investment (ROI) when determining eligibility. Some lenders may also require a down payment, typically around 10% to 20% of the equipment cost.


  • Improved Cash Flow: Spreading the cost of the equipment over time can free up working capital for other expenses.
  • No Large Upfront Payment: You typically don't need a large sum of money upfront, which can be helpful for businesses with limited capital.
  • Easier Qualification: It may be easier to qualify for equipment financing than for unsecured loans, making it more accessible for startups and small businesses.


  • Collateral Requirement: The equipment or another asset is typically required as collateral for the loan. 
  • Repossession Risk: Failure to meet loan repayments can result in the lender repossessing the collateral, potentially impacting your business operations.
  • Total Cost: Depending on the terms and interest rates, you may pay more for the equipment in the long term than if you had purchased it outright.

Business Line of Credit

business line of credit operates much like a credit card, serving as a revolving line of credit that provides companies with flexible access to funds. The credit limits usually range from $5,000 to $250,000, offering businesses the liquidity required to manage operational expenses, finance growth, or tackle short-term financial challenges. 

A business line of credit is a pre-approved pool of funds provided by a lender, which you can tap into as needs arise. Unlike a traditional loan, where you receive a lump sum upfront, here you draw from your credit line only when you need it.

You only pay interest on the funds you've used, not the entire credit line. Just like a credit card, you'll have a minimum monthly payment, but you can repay the balance in full anytime. As you repay, your available credit replenishes. You can use, repay, and reuse funds within your credit limit without reapplying.

Interest rates for business lines of credit are generally higher than those for traditional loans and can vary from 8% to 24%. A business credit score of 600 or above is commonly required to be eligible for a business line of credit. 

Additionally, lenders often look for a minimum annual revenue, which typically starts at $50,000. Time in business is another consideration; most lenders require that your business be in operation for at least one year. 


  • No Fixed Repayment Term: You're only required to pay interest on the amount you've borrowed, giving you the freedom to draw and repay at your own pace. 
  • Quick Access to Capital: Funds are usually readily available, often within a day, allowing you to address immediate business needs or opportunities.

  • Improves Cash Flow: This form of borrowing is ideal for managing irregular or seasonal income, helping maintain smooth business operations.


  • Higher Interest Rates: The interest rates are typically higher compared to traditional loans, which can make it more expensive in the long run.

  • Credit Score Risks: Frequent borrowing could negatively impact your business credit score, potentially affecting future loan approvals or terms.

  • Overborrowing Danger: The ease of access to funds can make it easier to overborrow, which can increase long-term debt.

Accounts Receivable Financing

Accounts receivable financing, often called invoice financing, allows businesses to turn their unpaid invoices into immediate cash. Instead of waiting for customers to pay within their usual credit terms, businesses sell outstanding invoices to a financing company. In return, the financing company provides an up-front payment, usually a percentage of the invoice's total value. Once the customer pays the invoice, the financing company takes a fee and gives the remaining balance to the business.

Pile of invoicesTypically, a franchisee can expect to receive anywhere from 70% to 90% of the total invoice amount upfront. Once the customer pays the invoice, the finance provider will release the remaining balance minus any fees.

Commonly, finance providers charge a factoring fee, which is a percentage of the invoice amount, ranging from 1% to 5%. This fee can increase the longer it takes the customer to pay off the invoice. Some providers might also include additional service or maintenance fees.

The funds from accounts receivable financing can be used for a variety of business-related purposes. This includes:

  • Payroll
  • Inventory purchases
  • Expanding or renovating the franchise location
  • Paying off debts or other financial obligations
  • Managing cash flow during slow seasons


  • Rapid Access to Cash: Accounts receivable financing provides quick liquidity, allowing you to meet immediate operational needs. This is particularly useful for businesses with cash flow constraints but a solid sales ledger.

  • Growth Opportunities: With fast access to cash, you can capitalize on time-sensitive growth opportunities that may arise. This can be helpful for scaling your business or entering new markets before competitors.

  • Negotiation Leverage: Having cash on hand may enable you to negotiate better terms with suppliers, potentially saving money in the long term. Suppliers are often more willing to offer discounts or favorable terms when they know you can pay promptly.


  • Reduced Revenue: You're essentially selling your invoices at a discount, diminishing your overall revenue. Over time, this can add up to a significant amount of lost income.

  • Limited Scope of Use: The funds acquired through this method are generally earmarked for operational expenses and cannot be freely allocated. This could be limiting if unexpected needs or opportunities arise that require a more flexible use of funds.

  • Not Versatile for Broader Ventures: It's not the most flexible financing option for larger or more complex business objectives, such as mergers or acquisitions. Businesses looking to diversify or undertake major initiatives may find this form of financing too restrictive.


Crowdfunding is a way new and old businesses alike can receive donations from others, usually through the Internet. This has changed the game because now anyone can help fund a business, not just banks or investors.

Unlike a traditional bank loan that comes with strict rules, crowdfunding allows you to set your own fundraising goals and ways to reward people who give you money. The business owner will often offer initial perks to anyone who pledges money in a crowdfund to be an attractive business prospect. 

You can promote your business through a personal page or apply to be listed on a crowdfunding platform. Popular crowdfunding platforms include sites like KickstarterIndieGoGo, and GoFundMe


  • Lower Entry Barriers: Unlike traditional financial institutions that often require high credit scores and extensive business histories, crowdfunding platforms do not have strict credit or financial requirements. Money raised through crowdfunding is typically considered a donation that doesn’t need to be repaid.
  • Dual Benefit: Crowdfunding can act as both a fundraising and marketing tool. It can generate buzz around your business or project while securing the capital you need.

  • Flexible Fund Usage: Depending on the campaign terms, the funds raised can either be earmarked for specific projects or milestones or used for various business needs. This offers adaptability in allocating resources.


  • High-Stakes Visibility: The public nature of the campaign means that any failure is out in the open, which can negatively impact the reputation of your business.

  • Requires Compelling Content: Success often hinges on a compelling business idea and a well-crafted pitch, which may require a significant investment in time and expertise.

  • Not Entirely Free Capital: Businesses may need to give up a small portion of equity or offer rewards to contributors, meaning the capital raised comes at a cost.

5 Steps to Get a Franchise Loan

The steps to getting a franchise loan are like any other business loan on the market.

Online loan application

Here are five steps anybody seeking a franchise loan should consider: 

  1. Research and choose a franchise: The first step is to research a franchise that you are interested in owning. Once you have identified a franchise, you should contact the franchisor to learn more about the requirements for owning and operating a franchise.
  2. Evaluate your finances: Next, you should evaluate your personal and business finances to determine how much you can afford to invest in the franchise. This includes reviewing your credit history, income, expenses, and assets.
  3. Develop a business plan: It’s important to develop a business plan that outlines your strategy for operating and growing the franchise. Your business plan should include financial projections, marketing strategies, and an overview of your management team. 
  4. Apply for a franchise loan: The fourth step is to apply for a franchise loan with a lender specializing in franchise financing. You will need to provide documentation such as financial statements, tax returns, and a signed franchise agreement.
  5. Complete the loan process: The final step is to complete the loan process, which includes providing additional documentation, such as a business plan and a lease agreement. Once the loan is approved, you will receive the funds to invest in the franchise and begin operating the business. It's important to remember that franchise loans often require a down payment, so you will need to have the necessary funds available to invest.

What are the Requirements for a Franchise Loan?

Most lenders will require the following information when applying for a franchise loan:

  • Signed franchise agreement. A signed franchise agreement is a legal document that outlines the terms and conditions of the agreement between the franchisor and franchisee. It provides lenders with information about the franchise, its history, and its potential for success.
  • Personal financial statements. Personal financial statements such as expenditure statements and tax returns provide lenders with information about the borrower's financial health, including assets, liabilities, income, and expenses. These statements help lenders evaluate the borrower's ability to repay the loan and the level of risk involved.
  • Personal credit History. Lenders use personal credit scores and history to evaluate the borrower's creditworthiness and determine the interest rate and loan terms. A good credit score and history can increase the borrower's chances of being approved for a loan and improve the loan's overall terms.
  • Business license. A business license is a permit issued by a local or state government that allows a business to operate legally within a particular jurisdiction. This document provides proof that the franchisee is authorized to operate the business.
  • Resume. A resume summarizes the borrower's work experience, education, skills, and qualifications. Lenders may request a resume to evaluate the borrower's business experience and assess their ability to successfully operate a franchise.
  • Business lease. A business lease is a legal agreement between the landlord and tenant that outlines the terms and conditions of the lease. This proves that the franchise has secured a location for the business and has a plan for paying rent and operating expenses.

Franchise Loans Wrap-Up

Franchising can be an excellent opportunity for individuals looking to start their own business without starting from scratch. Various financing options, such as franchise loans from banks and other financial institutions, can make this expansion more attainable. 

These loans can help you cover various costs for purchasing equipment, securing a location, or hiring employees. 

Franchise Financing FAQ

Still want to know more? Here are some common questions and answers about franchise funding. 

Do I Qualify for Financing?

Every lender will have unique requirements for financing eligibility, so it is wise to research your specific lenders to find the right fit. However, many lenders will have similar areas of interest that can help improve your chances of being approved for a loan. 

A healthy credit score and a clean financial record can improve your loan eligibility. Review your credit report to see if there are any areas of improvement or any claims to contest that can help improve your credit score. 

Your debt-to-income ratio (DTI) may also be factored into your loan eligibility, as lenders may be deterred by a high DTI. Paying off large debts quickly or improving your income with supplemental cash flow may improve your chances of loan approval.

Consider taking stock of your valuable assets that can be used as collateral, as offering collateral can often improve your chances of securing a loan. Assets are equipment, inventory, cash deposits, savings, property, or stocks. 

Can I Get a Franchise Loan for Any Business?

Before opting for business franchise loans, make sure to check the Small Business Authority’s (SBA) franchise directory. You’ll want to ensure that the business is listed in the directory and eligible for small business loans for franchise businesses. 

As a general rule, companies should meet the size standards set by the Small Business Administration (SBA), demonstrate repayment capability, and have a legitimate business objective. For more details and qualifications, check out the SBA Loans requirements on their website. 

Is a Down Payment Required?

Yes, a down payment is typically required for a franchise loan. The amount of the down payment can vary depending on the lender and the type of franchise, but it's generally in the range of 10% to 30% of the total loan amount.

Is There a Minimum Credit Score Requirement?

There is often a minimum credit score requirement for a franchise loan. The specific credit score requirement can vary depending on the lender and the type of franchise. Generally, lenders prefer to work with borrowers who have a credit score of at least 650 or higher.

However, note that credit score is just one of several factors that lenders consider when evaluating a franchise loan application. Other factors that may also be considered include the borrower's business experience, the financial strength of the franchise, the collateral available to secure the loan, and the borrower's ability to make a down payment or provide other forms of equity.

Do I Still Qualify for a Franchise Loan with Bad Credit?

Each lender will have its own eligibility requirements and assessment process. In most cases, a very low credit score will result in an automatic denial. However, some lenders may be willing to offer shorter-term and smaller-sum loans to damaged credit applications. Keep in mind that you may be charged higher interest.

Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.