Franchise Financing: How To Fund Your Acquisition

Securing the right financing is often the biggest hurdle for aspiring franchise owners. Many entrepreneurs underestimate both the initial investment and ongoing capital needed to sustain operations after opening.

Beyond the franchise fee, you'll also need to cover expenses like build-out costs, inventory, marketing, and employee salaries to get your business fully up and running.

This guide will help you explore financing options that fit with your financial situation, franchise type, and long-term business goals.

Researching Franchises/the FDD

The Franchise Disclosure Document (FDD) is a legal document that franchisors must give to potential franchisees at least 14 days before any agreement is signed or money changes hands. This document contains 23 sections with essential information about the franchise opportunity.

Some important financial sections in the FDD include:

• Initial investment (Item 7). Breaks down all startup costs, including the franchise fee, equipment, inventory, real estate, and working capital.
• Ongoing fees (Item 6). Details royalty fees, marketing contributions, and other recurring expenses that impact your cash flow.
• Financial performance (Item 19). While not required, many franchisors include information about how existing locations perform financially.

Franchise Financing Options

Here are the main ways to fund your franchise.

• SBA loan programs for franchises. The Small Business Administration has several loan programs that are popular for franchise purchases:
  • The SBA 7(a) loan offers up to $5 million with longer repayment terms and lower down payments than conventional loans.
  • The CDC/SBA 504 loan program offers long-term financing for major fixed assets, including real estate and equipment.
  • SBA Express loans provide faster approval for amounts up to $500,000.
• Traditional commercial bank financing. Many banks and financial institutions offer conventional business loans for franchise purchases. This typically requires stronger credit profiles, more collateral, and higher down payments (15-30%) than SBA loans.
• Franchisor financing programs. Many franchisors offer seller financing or have partnerships with preferred lenders. These programs may cover some or all startup costs and sometimes have reduced fees or special loan terms for qualified franchisees.
• Rollover for business startups (ROBS). This option allows you to use retirement funds from a 401(k) or IRA to invest in your franchise without early withdrawal penalties. ROBS requires setting up a C corporation and establishing a new retirement plan.
• Home equity loans and lines of credit. Using your home's equity can provide business financing at lower interest rates, but it puts your personal residence at risk if the business struggles.
• Friends and family investment. When borrowing from personal connections, formalize the arrangement with clear terms, documentation, and appropriate investment structures (loans, equity shares, or convertible notes) to protect all relationships involved.

Comparing Financing Options Based on Qualification Requirements

Understanding the specific qualification requirements for each option will help you determine which one is best for your situation.

• SBA loan programs for franchises
  • Credit score requirements typically start at 615+
  • Down payment of 10% of the total project cost
  • Personal guarantee from anyone owning 20% or more of the business
  • Your credit history must be clean of recent bankruptcies or defaults
  • Debt service coverage ratio (DSCR), usually requiring 1.25x or higher
• Traditional commercial bank financing
  • Stricter requirements than SBA loans with credit scores often 680+
  • Larger down payments ranging from 20-30%
  • Many banks require two to three years in business, which is not possible for new franchise purchases
  • Previous industry or management experience is often expected for business owners
• Franchisor financing programs
  • Requirements vary significantly depending on the franchise brand
  • Net worth minimums that align with the franchise's total investment
• ROBS qualification
  • Must have at least $50,000 in an eligible retirement account
  • No credit score requirements since you're using your own funds
  • You can use this with other financing methods for larger business ventures
• Home equity options qualification
  • Requires sufficient equity in your home (usually around 20%)
  • Credit score requirements typically 620+
  • Debt-to-income ratio requirements, usually below 43-50%
  • Expect lenders to verify your ability to manage monthly payments

Application Process and Timeline Expectations

• For SBA Loans, the process typically takes 60-90 days from application to funding. Small business owners must prepare a detailed business plan specific to their franchise business, personal financial statements, and documentation of personal assets for collateral.
• For traditional bank loans, the timeline usually requires 30-60 days for approval, with funding following within 1-2 weeks. Banks assess your business model viability and often require more extensive documentation than SBA loans.
• Franchisor financing is typically the fastest option, with approvals possible in 2-4 weeks. That's because the franchisor already understands their business model. Franchise owners of an existing franchise looking to expand often get even faster approval.
• For ROBS, it usually takes 3-4 weeks to establish the necessary corporate structure and complete the rollover process. There is no loan application, but the legal setup must comply with strict regulations.
• For equipment financing, approvals are generally quick, with approvals possible within 2-7 days and funding within a week. Some lenders even offer same-day approvals.

Remember that delays are common, especially for small business owners applying for SBA loans or bank financing. So, build extra time into your planning to avoid rushing important financial decisions for your new business. Visit BizQuest's Franchise Directory to start your franchise entrepreneurship dreams.