Understanding Franchise Resale Financing
What Is Franchise Financing?
Franchise financing refers to the ways a potential franchisee pays for an existing franchise resale purchase, the franchise fee and other costs. Even though franchises have proven business models, most new owners can’t afford to cover the entire cost out-of-pocket. They typically apply for loans or combine several sources of capital to raise funds. Lenders generally require a cash injection of 10–30% of the total investment, so having some personal funds is usually essential.
Typical Franchise Resale Costs
- Franchise resale purchase cost: This is the price you agree to pay the owner of the existing franchise you are buying.
- Franchise fee: The franchise fee grants you the right to use the brand and operating system of the franchisor.
- Working capital: You may need working capital for equipment, inventory, marketing and payroll expenses. Banks often want to see a detailed business plan with revenue and expense estimates.
- Ongoing fees: Most franchisors charge ongoing royalties and advertising fees. These fees are typically deducted from revenue and should be factored into cash-flow projections.
Major Franchise Financing Options
U.S. Small Business Administration (SBA) Loans
SBA loans are popular because the federal government guarantees a portion of the loan, which lowers lender risk and allows for lower down-payment requirements and longer repayment terms. Franchisees can borrow up to $5 million, and the SBA’s guarantee makes lenders more willing to work with first-time franchisees.
SBA 7(a) Loans
The SBA 7(a) loan is the SBA’s flagship loan program and is a strong financing option for franchise resales over $150K if there is 3 years of cash-flow/profit history and the sale price is less than 4× earnings. Whatever the cash flow/profit is, the business generally cannot sell for more than 4× that amount. Company assets (real estate, equipment, licenses, trademarks) may increase price.
Funds can be used for working capital, equipment purchases, real-estate acquisition or renovation, and debt refinancing. Terms may extend up to 10 years for working capital and 25 years for fixed assets.
The SBA 7(a) loan is beneficial because even if personal and business collateral is low or nonexistent, SBA banks may still approve your franchise resale acquisition. A lower equity injection (often around 10%) and long repayment period reduce monthly payments. However, fees are higher than with conventional loans and a personal guarantee is required.
SBA 504/CDC Loans
504 loans are designed for purchasing or renovating real estate or major equipment. They offer long-term financing with low down payments, but funds cannot be used for franchise fees or most startup costs. Borrowers repay two lenders (a Certified Development Company and a bank), and fees are usually higher.
SBA Microloans and 504 Loan Changes
Microloans (up to $50,000) are another SBA program, useful for very small franchises or short-term capital needs.
In 2025, the SBA tightened underwriting standards:
- Reinstated a 10% cash injection requirement for startups
- Reintroduced certain insurance obligations
- Reintroduced the SBA franchise directory to help lenders confirm brand eligibility
Conventional Bank Loans and Lines of Credit
Conventional loans and lines of credit are an option on larger franchise acquisitions over $1 million. They typically offer lower interest rates and origination costs than SBA loans, but require stronger credit histories and business records. New owners may struggle to qualify. Terms are often shorter, raising monthly payments, and lenders frequently require substantial collateral.
Franchisor or In-House Financing
Some franchisors offer financing directly or through preferred lenders. These programs can simplify the process and may include deferred payments or reduced collateral. However, franchisor financing usually covers only part of the investment, meaning buyers may still need a bank loan or personal funds.
Personal and Alternative Financing Options
Personal Savings and Cash
Using cash preserves full ownership and avoids interest, but increases personal risk and limits your financial cushion.
Home Equity Loans and HELOCs
Homeowners can tap home equity via:
- Home equity loan: Lump sum at a fixed rate
- HELOC: Revolving credit line with variable rates
Interest-only payments during the draw period make HELOCs flexible, but variable rates and later principal payments add risk. Because your home secures the loan, failure to repay could lead to foreclosure. HELOCs also appear as personal debt and can lower your credit score.
Rollovers for Business Startups (ROBS)
A ROBS lets you use retirement funds (401(k), IRA, etc.) to purchase stock in a new C-corporation. It is not a loan, so there are no payments or credit checks. Providers charge setup fees ($1,000–$5,000) plus monthly fees. You need at least $50,000 in retirement funds to justify costs.
ROBS requires strict compliance (Form 5500, allowing eligible employees to participate). If the business fails, you could lose your retirement savings. ROBS funds can also be used as a down payment for an SBA loan.
Seller Financing (Promissory Note to Seller)
Seller financing can cover 5–60% of the sale price. It is popular for resales under $250K or when financials do not support bank lending. Buyers usually make 10–15% down payments.
Sellers may request a credit report, PFS and business plan. A seller note plus an SBA 7(a) loan often increases approval chances and reduces down payment.
Securities-Based Lines of Credit (SBLOC)
SBLOCs let you borrow against non-retirement investments without liquidating them. Requirements often include $75,000+ in assets. Approvals can take as little as 3 days. These loans often have no application or annual fees and feature interest-only payments.
Market downturns may trigger margin calls, and you cannot use SBLOC proceeds to purchase additional securities.
Unsecured Business Lines of Credit
Unsecured credit lines require no collateral and offer flexible access to funds. Ideal for franchises under $250K if the buyer has a 700+ FICO Score. Faster to obtain than SBA loans, but more expensive. Lenders usually require at least 1 year in business, solid credit and minimum revenue.
Equipment and Asset-Based Loans
Useful for capital-intensive franchises needing vehicles, machinery or equipment. Approvals often take 1–2 days. Loans may offer favorable tax advantages and require little or no down payment. Collateral is the equipment itself.
Friends, Family and Private Investors
Can help buyers with limited credit. Investors may accept equity rather than interest. Formal agreements and legal advice are essential to protect relationships and meet legal requirements.
Crowdfunding, Peer-to-Peer and Revenue-Based Financing
Growing options as bank lending tightens.
- Crowdfunding: Investors receive rewards or equity.
- Peer-to-peer lending: More flexible credit criteria but interest may reach 25%.
- Revenue-based financing: Repay as a percentage of monthly revenue.
Franchise-specific programs and preferred lender networks may also offer flexible terms.
Comparing Financing Options: Pros and Cons
| Financing Type | Pros | Cons |
|---|---|---|
| SBA 7(a) | Lower down payment; long repayment terms; broad use of funds | Higher fees; personal guarantee; rates tied to prime |
| SBA 504 | Long-term, fixed-rate for real estate & equipment | Cannot finance franchise fees; multiple lenders; higher fees |
| Conventional Loans | Lower rates and origination costs | Harder to qualify; larger equity injection; shorter terms |
| Franchisor Financing | Streamlined; may offer deferred payments | Usually partial funding; sometimes higher rates |
| ROBS | Access retirement funds tax-free; no payments | Requires C-corp; fees; risk of losing retirement savings |
| Home Equity / HELOC | Lower rates; flexible draw periods | Home is collateral; variable rates; foreclosure risk; affects credit |
| Seller Note | Affordable payments; aligns seller with buyer success | Down payment and possibly collateral required |
| Securities-Based LOC | Fast liquidity; interest-only payments | Margin calls possible; not all investors qualify |
| Unsecured LOC | No collateral; revolving access; fast approval | Higher qualification standards; smaller limits; higher rates |
| Equipment / Asset-Based | Secured by equipment; tax advantages | Limited to equipment; risk of repossession; higher rates |
| Crowdfunding / P2P / RBF | Flexible and accessible alternatives | High rates; equity expectations; requires marketing |
| Friends & Family / Private Equity | Easier to obtain; mentorship potential | Risk to relationships; equity expectations |
Qualifying for Franchise Financing
Net Worth, Liquidity and Collateral
Lenders want franchisees with positive net worth and enough liquid assets to cover startup costs and personal living expenses. Collateral may include cash, property, vehicles or securities.
Credit Score and Financial History
Strong personal credit is essential. Reviewing your credit report beforehand gives time to correct errors.
Business Plans and Franchisor Support
A detailed business plan with financial projections is critical. Many franchisors help by providing market analysis and financial data. Lenders prefer proven franchise brands. Loan brokers can help package and present applications.
Steps to Secure a Franchise Loan
- Talk to the franchisor: Ask about in-house financing or preferred lenders, and confirm SBA directory status.
- Verify SBA eligibility: Ensure the franchise is eligible under the SBA’s franchise directory.
- Determine collateral and down payment: Lenders often expect 20%.
- Check your credit history: Resolve any errors.
- Create a detailed business plan: Include projections, analysis and operating plans.
- Gather documentation: PFS, tax returns, franchise agreement, SBA Form 1919 and more.
Tips for Choosing the Right Financing Option
- Match financing to goals: Pair real-estate investments with SBA 504; use SBA 7(a) or credit lines for working capital.
- Compare offers: Evaluate rates, fees, terms and collateral.
- Consider personal risk tolerance: Weigh lower payments against risks to personal assets.
- Seek professional advice: Financial advisors, accountants and SBA-preferred lenders can help.
Conclusion and Next Steps
Franchise financing is not one-size-fits-all. Entrepreneurs should assess capital needs, credit profile, collateral and risk tolerance before choosing a funding method. SBA loans remain popular for their favorable terms, conventional loans for their lower rates, and alternative financing options help bridge gaps or provide fast capital.
Compare multiple offers, align financing to your goals and get expert guidance. The path to franchise ownership begins with understanding your options and building a solid financial foundation.
