How to Finance a Franchise Purchase

SBA Loans (Most Common)

The Small Business Administration backs loans through approved lenders, reducing risk for the bank and making franchise financing more accessible.

**SBA 7(a) Loan:** - Up to $5 million - 10-year term for working capital, 25-year for real estate - Interest rates: Prime + 1.5% to 4.75% - Down payment: typically 10% to 20% - Best for: Established brands with strong unit economics

**SBA Express Loan:** - Up to $500K - Faster approval (36-hour turnaround) - Higher interest rates - Best for: Smaller franchises or working capital

**Key advantage:** The SBA Franchise Directory lists pre-approved franchise brands. If your brand is on the list, the loan process is significantly smoother.

ROBS (Rollover as Business Startup)

Use your 401(k) or IRA to fund your franchise without early withdrawal penalties.

**How it works:** Your retirement funds are rolled into a new C-corporation, which then funds the franchise. You are investing your retirement money into your own business.

**Pros:** No debt, no interest payments, use your own money **Cons:** You risk your retirement savings, complex setup ($5K setup fee), C-corp tax treatment **Best for:** People with $100K+ in retirement accounts who want to avoid debt

Home Equity Loan or HELOC

**Pros:** Lower interest rates than business loans, interest may be tax-deductible **Cons:** Your home is collateral, variable rates on HELOCs **Typical terms:** 80% to 85% loan-to-value ratio

Franchisor Financing

Some franchisors offer direct financing or have relationships with preferred lenders.

**What to look for:** Deferred royalty periods, reduced initial fees, or direct lending programs. These are more common with newer or growth-stage brands trying to attract franchisees.

Friends and Family

The most common early-stage funding source, but also the most relationship-risky.

**Best practices:** Treat it like a real investment with proper documentation, clear terms, and a written agreement. Do not accept money from anyone who cannot afford to lose it.

Typical Capital Stack

Most franchisees use a combination: - **20% to 30%** personal savings/cash - **50% to 70%** SBA or conventional loan - **0% to 20%** alternative sources (ROBS, home equity, family)

The SBA generally requires franchisees to inject at least 20% to 30% of the total project cost from personal funds.