Financing a franchise: your questions, answered
A plain-language walkthrough of how franchise owners pay for a new location, buy an existing one, or add units.
Can you use an SBA loan to buy a franchise?
Yes. SBA loans are one of the most common ways to finance a franchise, and most franchise owners use an SBA 7(a) loan, which can go up to $5 million. The franchise brand itself needs to be eligible for SBA financing, and the SBA keeps a Franchise Directory of brands that qualify. A lender can check the brand you’re considering early in the conversation.
What can an SBA franchise loan pay for?
- The initial franchise fee
- Build-out, construction, or renovation of your location
- Equipment, furniture, fixtures, and signage
- Opening inventory and working capital to get through the ramp-up period
- Real estate, if you’re buying the building
- The purchase price of an existing franchise location
How much do I need for a down payment?
For a new franchise location, SBA rules generally require a down payment of at least 10% of the total project cost. Money you’ve already put in, like a franchise fee you’ve paid, can often count toward it. Buying an existing location works similarly, and a lender can tell you exactly what counts for your situation.
What is the Franchise Disclosure Document (FDD), and why does it matter?
The FDD is a document franchisors must give you at least 14 calendar days before you sign a franchise agreement or pay any money. It’s one of the most important things you’ll read, and lenders use it too. A few sections deserve extra attention:
- Items 5 through 7: the initial franchise fee, ongoing fees like royalties, and the franchisor’s estimate of your total initial investment.
- Item 19: financial performance information, if the franchisor provides it.
- Item 20: how many locations have opened, closed, or changed hands, which says a lot about the system’s health.
- Item 21: the franchisor’s own audited financial statements.
How do I estimate the total cost of opening a franchise?
Start with Item 7 of the FDD, which gives a range for your estimated initial investment. Then add a working capital cushion for the months before the location covers its own costs, and talk with current franchise owners about what they actually spent. Your lender will build the financing around the full project cost, not just the franchise fee.
What do lenders look at for a franchise loan?
- The brand: an established franchise system with a track record, strong support and training, and healthy unit performance.
- Your experience: management, industry, or business experience, and a clear plan for running the location.
- Your credit history: a responsible personal credit and financial track record.
- Cash flow: projections for a new location, or tax returns and financial statements for an existing one.
- A down payment: generally at least 10% of the total project cost for a new location.
- A personal guarantee: owners of 20% or more of the business generally guarantee an SBA loan.
Should I open a new location or buy an existing one?
A new location lets you choose the site and build it your way, but you start without a sales history. An existing location, sometimes called a resale, comes with customers, staff, and a financial track record, which can make the numbers easier to evaluate. Buying an existing location also requires the franchisor’s consent to transfer the franchise to you.
Can I finance more than one location?
Yes. Many owners grow into multi-unit operators, and SBA loans can help fund additional locations. Lenders look closely at how your existing units are performing, and SBA loan limits apply across all of your SBA loans, so it’s worth planning your growth with your lender early.
What does the SBA loan process look like?
- Pick your brand and location plan. Review the FDD and talk with current franchise owners.
- Talk with an experienced SBA lender. First Bank of the Lake is a nationwide SBA Preferred Lender for 7(a) loans and works with franchise owners across the country.
- Apply and share your documents. Expect SBA forms, personal financial statements, your franchise agreement or FDD, a business plan, and projections.
- Underwriting. The lender reviews everything, may ask follow-up questions, and issues a loan commitment if the loan moves forward.
- Closing. You meet the conditions in the commitment, sign the loan documents, and the funds are disbursed for your project.
How long it takes depends on the brand, the location, and how quickly documents come together. A specialist can walk you through what to expect for yours.
