Buyer Guide
How to Finance a Franchise: 7 Options Compared
SBA 7(a), SBA 504, ROBS, home equity, and 4 more franchise financing options compared on rates, terms, and down payment. Data from 169K SBA loans.
The most common way to finance a franchise is through an SBA 7(a) loan, which accounts for the majority of the 169,000 franchise loans in the FranchiseVerdict database. SBA 7(a) loans offer up to $5 million with 10–25-year terms and require 10–20% down. Other options include SBA 504 loans for real estate, conventional bank loans, ROBS (Rollovers for Business Startups), home equity lines, franchisor financing, and portfolio lenders. The right choice depends on your credit profile, available collateral, and the total investment size disclosed in the brand's FDD Item 7.
Why financing matters more than the franchise fee
Most prospective franchisees focus on the franchise fee — typically $25,000 to $50,000 — but the total initial investment (FDD Item 7) is almost always several times larger. A McDonald's franchise fee is $45,000, but the total investment ranges from $523,000 to $2.6 million. Financing determines not only whether you can open, but how quickly you can reach profitability after accounting for debt service.
Across the 169,000 SBA 7(a) franchise loans in our database, the average loan size is approximately $350,000, and the overall charge-off rate is 23.1%. Choosing the right financing structure — and the right brand — materially affects your odds of repaying that loan.
7 franchise financing options compared
Here is how the seven primary financing methods stack up on rates, terms, and requirements:
| Option | Typical Rate | Term | Down Payment | Best For |
|---|---|---|---|---|
| SBA 7(a) | 10.5–13.5% | 10–25 yr | 10–20% | Most franchise purchases |
| SBA 504 | 6.5–8% | 10–25 yr | 10% | Real estate & heavy equipment |
| Conventional bank | 8–12% | 5–10 yr | 20–30% | Strong credit, existing bank relationship |
| ROBS | 0% (no debt) | N/A | 100% (retirement) | Large 401(k)/IRA balance, no debt desired |
| Home equity (HELOC) | 8–10% | 10–20 yr | 0% | Homeowners with significant equity |
| Franchisor financing | 8–15% | 3–7 yr | Varies | Partial financing, franchise fee deferrals |
| Portfolio lender | 9–14% | 5–15 yr | 15–25% | Declined by SBA, complex deals |
Option 1: SBA 7(a) loans — the franchise standard
The SBA 7(a) program is the most common financing vehicle for franchise purchases. The SBA does not lend directly — it guarantees up to 85% of loans under $150,000 and 75% of larger loans, reducing risk for the bank. This guarantee is why banks will lend to first-time business owners who would otherwise not qualify for a commercial loan.
Key requirements: minimum 680 credit score (most lenders prefer 700+), 10–20% equity injection, a personal guaranty, and the franchise brand must be listed on the SBA Franchise Directory. Loan amounts range from $50,000 to $5 million. You can check any brand's SBA loan history — including the charge-off rate across all borrowers — in our SBA data explorer.
Option 2: SBA 504 loans — for real estate
SBA 504 loans are designed for purchasing commercial real estate or major fixed assets. They are structured as two loans: a conventional bank loan covering 50% of the project, a Certified Development Company (CDC) loan covering 40%, and a 10% borrower down payment. Rates on the CDC portion are typically lower than 7(a) rates because the debentures are backed by the U.S. Treasury. This option works best for franchises that require purchasing the building — such as hotels, gas stations, or large restaurants.
Option 3: Conventional bank loans
If you have strong credit (740+), an existing banking relationship, and 20–30% to put down, a conventional commercial loan can close faster than an SBA loan and without the SBA guaranty fee (which adds 2–3.5% to the loan amount). The trade-off is shorter terms (typically 5–10 years versus 10–25 for SBA) and stricter qualification criteria. Some banks also require two or more years of business ownership experience.
Option 4: ROBS (Rollovers for Business Startups)
A ROBS arrangement lets you use retirement funds (401(k) or IRA) to fund a business without early withdrawal penalties or taxes. You form a C corporation, create a retirement plan within it, roll your existing retirement funds into that plan, and the plan purchases stock in the new corporation. The corporation then uses that capital to buy the franchise.
The advantage is zero debt service. The risk is substantial: if the franchise fails, you lose both the business and your retirement savings. ROBS is legal but scrutinized by the IRS, so professional administration (costing $4,000–$6,000 upfront plus annual fees) is essential. Only consider this option if you have retirement assets well in excess of what you need for the franchise investment.
Option 5: Home equity (HELOC)
A home equity line of credit can provide low-cost capital for a franchise down payment or the entire investment for lower-cost franchises. Current HELOC rates run 8–10%. The risk is obvious: your home serves as collateral. If the franchise fails and you cannot repay, you could lose your house. Consider a HELOC for only a portion of the capital — typically the equity injection required for an SBA loan — rather than the full investment.
Option 6: Franchisor financing
Some franchisors offer direct financing or deferred payment plans. This is most common for the franchise fee itself (allowing payment over 12–24 months) rather than the full investment. Check FDD Item 10, which discloses any financing the franchisor offers or arranges. Be cautious about franchisor-arranged third-party lending, which may carry higher rates than you could obtain independently.
Option 7: Portfolio lenders
Portfolio lenders (also called non-bank lenders or alternative lenders) keep loans on their own books rather than selling them to the secondary market. They have more flexible underwriting criteria and can approve borrowers who were declined by SBA lenders. The trade-off is higher rates (typically 9–14%) and shorter terms. Portfolio lenders are most useful for multi-unit operators, borrowers with complex financial situations, or brands that are not on the SBA Franchise Directory.
How to match financing to your franchise
The right financing depends on the brand's total investment range (FDD Item 7), your available capital, and the brand's SBA track record. Before approaching a lender:
- Check the brand's SBA data. Use the SBA explorer to see how many loans have been made for that brand and what percentage defaulted. Lenders look at this data too.
- Calculate total debt service. Use the FDD Item 7 midpoint investment, subtract your equity, and model monthly payments at current rates. Compare against Item 19 revenue data (if available) to see if the business can service the debt.
- Get pre-qualified before signing the franchise agreement. A financing contingency in your franchise agreement protects you if the loan falls through.
- Compare at least three lenders. SBA loan terms vary significantly between banks. The guaranty fee, interest rate spread, and closing timeline can differ by thousands of dollars.
Use the brand comparison tool to evaluate investment ranges and revenue data side by side before committing to a financing path.
Related franchise research
Continue your research with our franchise failure rate analysis, franchise owner salary guide, and is buying a franchise worth it.
Take your franchise research further
- 📄 Download any brand's FDD summary — $5 per brand
- 📞 Get verified franchisee contacts — $49 per brand. Call real owners before you sign.
- 📊 Compare brands with our profitability report — $99
Frequently Asked Questions
- What is the most common way to finance a franchise?
- SBA 7(a) loans are the most common franchise financing method, accounting for the majority of the 169,000 franchise loans tracked by FranchiseVerdict. They offer up to $5 million with 10-25-year terms and require only 10-20% down. The SBA guarantees 75-85% of the loan, making banks more willing to lend to first-time franchise buyers.
- How much down payment do I need for a franchise?
- Most SBA 7(a) loans require 10-20% of the total project cost as an equity injection. Conventional bank loans typically require 20-30% down. For a franchise with a $500,000 total investment, you would need $50,000-$150,000 in available capital depending on the financing method. Some franchisors offer deferred franchise fee payments, which can reduce the upfront cash requirement.
- Can I use my 401(k) to buy a franchise?
- Yes, through a structure called ROBS (Rollovers for Business Startups). You form a C corporation, create a retirement plan, roll your existing 401(k) or IRA into it, and the plan purchases stock in the corporation. This avoids early withdrawal penalties and taxes. However, if the franchise fails, you lose both the business and your retirement savings. Professional administration costs $4,000-$6,000 upfront plus annual fees.
- What credit score do I need for an SBA franchise loan?
- Most SBA lenders require a minimum credit score of 680, though scores of 700 or higher significantly improve approval odds and can result in lower interest rates. You also need to demonstrate relevant business or management experience, provide a personal guaranty, and show that the franchise brand is listed on the SBA Franchise Directory.
- Do franchisors offer financing?
- Some franchisors offer direct financing or deferred payment plans, typically for the franchise fee rather than the full investment. Check FDD Item 10, which discloses any financing the franchisor offers or arranges. Be cautious about franchisor-arranged third-party lending, which may carry higher rates than what you could obtain independently through an SBA lender or local bank.