Understanding Franchise Ownership
February 25, 2025 | Last Updated on: February 25, 2025
By Melanie Lockert
Entrepreneurs who don’t necessarily want to start a new business can look into buying an existing franchise. Starting a franchise business can give you the freedom to work for yourself but under an established brand. It’s a way to become a small business owner under the umbrella of a larger company that allows you to license their products and assets.
Becoming a franchise owner can be an exciting opportunity that gives you the best of both worlds. You can build a business without starting from scratch and can capitalize on the company’s name brand.
However, being part of such an arrangement comes with a cost. According to the International Franchise Association, startup costs for buying a franchise can be as low as $20,000 or less or as high as $1 million or more. That can be a lot more money than business owners have on hand, which is where franchise financing comes in.
What is Franchise Financing?
Franchise financing is any type of business loan or line of credit that can help pay for costs associated with owning a franchise. Some costs include franchise fees, real estate, marketing, inventory, equipment, and more, according to the Franchise Business Review.
Types of Franchise Financing
If you’ve done your research and market analysis and want to buy a franchise brand, there are multiple types of franchise financing available. Be aware that while you might be able to get franchise loans, typically you’ll still need to provide a down payment of 20%.
1. Bank Loans
Some commercial banks and other financial institutions offer franchise loans to help you cover costs, including:
- BMO
- Bank of America
- Stearns Bank
- Eastern Bank
If you have an established relationship with your bank, you can ask about their loan options, interest rates, and repayment terms. Banks may have more stringent requirements, so you generally need a strong credit history and business plan to qualify.
2. The U.S. Small Business Administration (SBA)
Franchise loans are also available from the Small Business Administration. The entity has different loan programs, but the SBA 7(a) loan is the most popular option for franchising.
Through the SBA 7(a) loan program, you can borrow up to a maximum of $5 million. These funds can be used for:
- Acquiring real estate
- Working capital
- Purchasing equipment and supplies
The SBA is the backing agency that guarantees the loans, but you’ll need to find an SBA lender to get this type of financing.
3. Franchisor Financing
You may be able to work with the franchise company and get franchisor financing. Through this option, the parent company may have franchise loans to keep financing in-house.
In other instances, the company might work with preferred lenders to help you with the transaction. In other cases, the company may offer financial incentives and perks.
4. Online Lenders
Some online lenders may offer franchise financing. However, this option is generally better if you already have an existing franchise. You may be able to get working capital loans or term loans. Your creditworthiness, annual revenue, and time in business are likely going to be used when a lender is reviewing your application.
The benefit of online lenders is they typically move faster than traditional financial institutions. Eligibility requirements can also be more flexible, but it depends on the lender and type of loan.
5. Equipment Financing
If you need to purchase significant amounts of equipment for your new franchise, equipment financing is another option to look into. Equipment loans tend to be less risky. Lenders use the actual equipment as collateral to back the loan.
6. Business Line of Credit
A business line of credit allows you to access funds from a specific credit limit. You can then draw from that amount and use the money you need for franchise financing. It’s not like a traditional loan which comes in a lump sum.
Rather, it’s more like a credit card that offers revolving credit. That means you can use your business line of credit and when you pay off what you borrow, you can continue to use up to the credit limit.
7. Rollover for Business Startups (ROBS)
One of the lesser-known franchise financing options is ROBS or Rollover for Business Startups. It’s a way to leverage your retirement funds and put them into your new business or franchise.
While this is one way to get a business loan for franchise purchases, the IRS notes ROBS come with risk and complexity.
It could potentially put your retirement funds and business at risk. So other franchise financing options may be safer and more straightforward.
8. Friends, Family, and Outside Investors
If you want to open a new franchise location and need minimal business financing, you can try to tap your network for additional funds. Your friends, family, and outside investors may be able to lend you money to get your new startup business off the ground.
Owning a franchise of a well-known brand can help with your request and assure outside investors that you’ll make a return on their investment.
How to Get Franchise Financing
- Review options. Look at the franchise financing options and review the pros and cons. Check the interest rates on each loan product and note the loan terms, which affect how long you have to pay the loan and your monthly payments.
- Evaluate your resources. To qualify for a business loan for franchise purposes, you generally need a good credit score and to put up collateral. See where you’re at so you know you meet the minimum credit score and down payment requirements.
- Know what you need. Do your research and know the amount you need to borrow to buy a franchise. This can help with budgeting and ensure you have enough cash flow to sustain your new business model.
- Prepare documentation. The loan process for franchise financing will typically require supporting documentation. You might need to provide a business plan, a snapshot of your personal assets, tax returns, business revenue, etc.
- Apply for a business loan for franchises. Go to your preferred lender and apply for franchise financing and wait for approval. Know the potential funding timeline and when repayment starts.
Final Thoughts
Opening a franchise can be rewarding. It gives you autonomy and the confidence of working under an established business and brand with a customer base. Franchise financing can help you move forward and start your next chapter.
FAQs about Franchise Financing
What Franchise Financing Options Are Available?
Franchise financing comes in many forms, including bank loans, SBA loans, and business loans from online lenders.
How Do You Buy a Franchise?
You can research franchising options with the International Franchise Association directory, look into franchise financing, and review the Franchise Disclosure Document (FDD).
Can You Use SBA Loans for a Franchise?
You may qualify for an SBA 7(a) loan to purchase a franchise. Franchise financing with SBA loans must come from an SBA lender.
How Much Money Do You Need to Start a Franchise?
The cost of starting a franchise depends on many factors, however, you typically need $20,000 or less or up to $1 million plus, according to the International Franchise Association.
Can I Get a Traditional Business Loan for a Franchise?
Small business loans for buying a franchise may be available from some financial institutions.
