How to Finance a Franchise: A Buyer's Guide

Most franchise buyers fund the purchase with a mix of cash and an SBA-backed loan, but four other routes — conventional bank loans, retirement-account rollovers (ROBS), home equity, and franchisor financing — fill the gaps. Which combination fits depends on how much cash you can put down, your credit, the assets you can pledge, and the franchise’s total cost in Item 7 of the FDD. The goal is to fund the full investment and leave a working-capital cushion, not to borrow the bare minimum to open.

This guide walks through the main financing options, what each demands, and what lenders look at before they say yes.

Start With the Real Number: FDD Item 7

Before you talk to a lender, know what you actually need to raise. Item 7 of the FDD gives the estimated initial investment — fees, build-out, equipment, and a working-capital line — and Item 10 discloses any financing the franchisor itself offers or arranges. Borrow to the high end of Item 7, not the low end, and add a cushion to operate until break-even. Underfunding is one of the most common reasons a viable franchise fails, so the financing plan and the working-capital plan are the same conversation.

SBA Loans: The Default Path for Franchises

Loans guaranteed by the U.S. Small Business Administration are the most common way to finance a franchise, because the government guarantee lets banks lend to new owners on longer terms and lower down payments than they’d otherwise accept.

The workhorse is the SBA 7(a) loan, with a standard maximum of $5 million, used for the franchise fee, build-out, equipment, and working capital. SBA Express is a faster-turnaround 7(a) option capped at $500,000. The 504 loan is aimed at real estate and major equipment rather than general startup costs.

One franchise-specific wrinkle matters as of mid-2026: the SBA reinstated its Franchise Directory effective June 1, 2025, after eliminating it in 2023. A franchise brand listed in the Directory is pre-screened as SBA-eligible, which speeds up loan approval; if a brand isn’t listed, expect the lender to do its own eligibility review. Ask the franchisor whether the brand is in the current SBA Franchise Directory before you apply. (SBA program terms and limits change periodically — confirm current figures with an SBA-preferred lender.)

The Other Four Routes

Conventional loans skip the SBA process but usually require stronger credit, more collateral, and a larger down payment — tougher for a first-time franchisee with no operating history. ROBS (Rollover for Business Startups) lets you fund the business with retirement savings without an early-withdrawal penalty, but it places those savings at risk and must be structured to strict IRS and ERISA rules — do it only with a specialist. Home equity is often the cheapest money available to a homeowner, at the cost of pledging your house. Franchisor financing, disclosed in Item 10, can be convenient but isn’t automatically the best deal; compare its rate and terms against an SBA option.

What Lenders Look At

Whatever the source, lenders evaluate the same things, so prepare them before you apply: a credit score and history (higher is cheaper), a cash down payment (commonly 10–30% of the project), collateral, and a business plan with realistic cash-flow projections built from the franchise’s Item 7 and Item 19 data. A clean, complete package — financials, tax returns, the FDD, and a defensible projection — is what moves an application quickly. Lenders also like franchises precisely because the FDD gives them a documented cost and performance picture to underwrite against.

Frequently Asked Questions

What’s the most common way to finance a franchise?

A combination of personal cash and an SBA-guaranteed 7(a) loan. The SBA guarantee lets banks offer new franchise owners longer terms and lower down payments than a conventional loan typically allows.

How much money do I need to put down?

It varies by lender and program, but franchise buyers commonly put down roughly 10–30% of the total project cost, with the rest financed. Build the total from the high end of FDD Item 7 and include a working-capital cushion.

Can I use my 401(k) to buy a franchise without a penalty?

Yes, through a ROBS (Rollover for Business Startups) structure, which avoids the early-withdrawal penalty — but it puts your retirement savings at risk and must follow strict IRS and ERISA rules. Use a provider that specializes in ROBS.

Does the franchisor help with financing?

Sometimes. Item 10 of the FDD discloses any financing the franchisor offers or arranges, directly or through partners. Read it, but compare the terms against an SBA or conventional loan rather than assuming it’s the best option.

Financing a franchise well starts with knowing the true cost and obligations in the FDD — the same document a lender will underwrite against. Reidel Law Firm reviews FDDs for prospective franchisees on a flat fee, so you know exactly what you’re financing before you sign — get your FDD reviewed before you commit to a lender or the deal.