SBA Loans for Franchises: How Can You Get One
The Small Business Administration (SBA) offers financing solutions for entrepreneurs who want to open their own franchise but need to overcome the high upfront costs. An SBA loan can be used to finance initial startup expenses, such as working capital, securing real estate and purchasing equipment.
For aspiring franchise owners, SBA loans provide a pathway to funding with favorable rates and terms. These loans have some unique perks, including lower down payment requirements and longer repayment terms, which could make franchise ownership more accessible.
SBA loans for franchises
There are various types of SBA loans available, each with its own terms, rates and purposes. Here are two common options available to franchise owners:
SBA 7(a) loans for franchises
The 7(a) loan program is the SBA’s flagship product for general financing. Franchise owners can use this loan for purchasing real estate, fixed assets, working capital and even refinancing existing debts. With amounts available up to $5 million, business owners can use it as a loan to start a franchise and cover initial startup costs.
Terms for a 7(a) loan can extend up to 300 months but will vary depending on the franchisee’s intended use of the proceeds. Interest rates are based on the prime rate, currently 7.50%, meaning the rate you pay will change with the economy.
However, the SBA sets limitations to keep rates from getting too high. These rate caps vary based on your loan type and amount. Rates for variable loans max out at 10.50% to 14.00% , and rates for fixed loans max out at 12.50% to 15.50% (based on the current prime rate of 7.50%). The maximum rate is based on your loan size.
SBA 504/CDC loans for franchises
Unlike the general-purpose 7(a) loan, the 504/CDC loan program is for securing major fixed assets, such as machinery and equipment, and can be used for purchasing real estate and remodeling buildings, too. For example, a restaurant franchise owner may use a 504 loan to purchase commercial kitchen equipment. The 504 loan’s maximum amount is $5,500,000, with terms extending up to 300 months.
The 504 loan structure consists of three parts: 40% of the funding comes from the Certified Development Company (CDC), 50% from the third-party lender and the remaining 10% from the franchisee. Interest rates are tied to the current market rates for 10-year U.S. Treasury issues, but in general, rates cost approximately 3.00% of the total loan amount.
With this loan type, you will also need to meet the SBA’s job creation and retention requirement, which means you must create or retain at least one job for every $90,000 you borrow.
How to apply for an SBA loan as a franchise owner
The steps for applying for an SBA loan are similar to applying for any other type of loan, though you may need to do some additional research to confirm that your franchise brand qualifies for this type of funding.
Confirm your franchise is eligible for SBA financing
Individual lenders set their own requirements for SBA loans, so the exact criteria you need to meet will depend on the lender you choose. But in general, you’ll need to be in business for at least two years with a good credit score to qualify.
There are also certain requirements set by the SBA that your business must meet regardless of the lender you’re working with. For example, you must be a for-profit business operating in an eligible industry that meets the SBA’s size standards.
It’s also worth noting that the SBA used to maintain a franchise directory, which made it easy to determine which brands were eligible for SBA franchise financing. Though this directory was discontinued in May 2023, it is still downloadable and could still be a valuable resource. If your franchise is listed on the directory, it’s likely that lenders will consider you eligible for an SBA loan. If your brand is not listed on the directory, consider asking the franchiser if things have changed since the list was last updated.
Choose a loan type and lender
Each SBA loan program has its pros and cons. Your financing needs will help determine which program is ideal for your situation. One franchise owner may benefit from using the specialized 504/CDC loan to finance major fixed assets, such as commercial equipment, while another franchisee may use the 7(a) loan to cover general expenses, like inventory and supplies.
Keep in mind that the SBA does not issue loans directly to franchise owners — you’ll need to apply through SBA-approved lenders. The SBA’s Lender Match Tool can help connect you with qualified lenders in your area.
Gather your documents
The documentation requirements will vary by lender. Generally, you’ll supply the following documents:
- SBA loan application form (Form 1919)
- Copy of a signed franchise agreement
- Statement of personal history
- Personal financial statements
- Business financial statements, such as current profit and loss statements and a one-year financial projections statement
- Documentation of any subsidiaries and affiliates
- Original business license or certificate of doing business
- Personal and business income tax returns
- Copy of business lease
- Records of loans you previously applied for
Depending on the loan and amount, the lender may also require you to provide a personal guarantee, which holds you liable for repaying the loan if you default on your payments. Alternatively, you may need to secure the loan with collateral. If you fail to repay the loan, then the lender can exercise its right to seize the collateral to recoup its loss.
Submit your loan application
After submitting your loan application, some lenders may have additional questions or request additional documentation. Be sure to review all the essential details, such as the interest rate and repayment terms, before accepting a loan proposal. Some SBA lenders may require a 10% to 30% down payment, depending on whether you are purchasing an existing franchise unit or opening a new location. Our SBA loan calculator can help you estimate how much your monthly payments will be.
Generally, the process for securing an SBA loan for franchise owners can take two to three months. It’s possible to shorten the timeline by working with an SBA Preferred Lender — these lenders have the authority to make final decisions on loan applications instead of waiting for approval by the SBA.
Alternative franchise financing options
If you want to explore franchise business loans beyond the SBA, then consider the following options.
Loan from the franchiser
Some franchisers offer in-house financing. You’ll usually find details about this on Item 10 of the franchise disclosure document, a comprehensive document about the franchise system that the franchiser must give you. Similar to traditional lenders, the franchiser will review eligibility factors, such as your credit score, net worth and how much liquid capital you have available.
While securing financing directly from the franchiser can be convenient, it’s often worth shopping around with different lenders for the best terms and rates. If the franchiser doesn’t offer direct financing, you can still inquire about funding — some franchisers have preferred lending partners you can use.
Business term loans
Many banks and lenders offer general business loans that can be used to fund a franchise. These loans can cover a variety of expenses, including business expansion and facility renovations. Like the SBA, traditional bank loans are attractive due to their competitive interest rates. However, loans from traditional banks also tend to have strict eligibility requirements, which can make it difficult for inexperienced franchisees to qualify.
If you don’t qualify for a traditional bank loan, an alternative lender may be another option. Unlike SBA loans, which may take months to fund, some of these lenders provide funding as quickly as the same day — ideal for franchisees that may need capital quickly. Just keep in mind that you will likely pay higher interest rates than you would with an SBA loan. Also, online lenders may require daily or weekly loan payments, rather than monthly payments.
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