Franchises come in many shapes and sizes. Some require modest capital to get started, while others come with higher fees, more complex operations, and significant upfront investment. What you pay often depends on the industry, the size of the opportunity, and the level of support the franchisor provides.
Part of the cost covers the right to operate under a known brand name. You are also paying for access to their business model, training programs, operational systems, and marketing tools. These are developed to help franchisees launch and run their locations more efficiently than if they were starting from scratch.
According to the International Franchise Association (IFA), this built-in support system is one of the key reasons many entrepreneurs choose franchising over independent ownership. The franchisor has already tested the concept, identified best practices, and built recognition in the market. In return, franchisees pay an initial franchise fee as well as ongoing royalties or service fees.
Understanding what these fees include and what they don’t is an important part of financial planning. Before looking into funding options, it helps to be clear on what you are paying for and what you’ll still need to budget on your own. That includes real estate, equipment, staffing, inventory, insurance, and working capital to cover the business in its early stages.
Why Financing Should Be Planned Carefully
Franchise ownership requires more than just an upfront payment. You’ll need a clear understanding of how much capital is needed not only to open but also to sustain the business through its early stages.
According to the IFA, one of the most common challenges new franchisees face is limited access to working capital. Even when initial setup costs are covered, the business may take time to generate steady cash flow. Expenses such as payroll, rent, marketing, and inventory will continue regardless of early revenue performance.
That’s why many franchisors outline minimum capital requirements as part of their qualification process. These are based on real-world operating costs and are designed to give franchisees a better chance at long-term stability.
If you’re serious about moving forward, it’s worth taking time to calculate your total funding needs. That includes the franchise fee, setup costs, and enough reserves to keep the business operating for several months. Clear planning gives you more flexibility when choosing funding sources and positions you to meet lender or franchisor expectations with confidence.
Know Where You Stand Financially
Before exploring financing options or choosing a franchise, it’s important to take a close look at your financial position. Most franchisors set minimum financial requirements for new franchisees, including net worth and liquid capital. These benchmarks are based on what it typically takes to open and sustain a franchise location.
Start by calculating your net worth. This gives you a clearer view of what kind of investment you can realistically take on.
Net Worth = Total Assets minus Total Liabilities
What counts as assets:
- Cash in checking and savings accounts
- Stocks, bonds, or other investments
- Real estate (using current market value)
- Vehicles, whether fully paid or not
- Retirement accounts, depending on use restrictions
- Other personal or business holdings
What counts as liabilities:
- Credit card balances
- Auto loans
- Mortgages or home equity loans
- Student loans or personal loans
- Any other outstanding debts
Once you have your net worth, the next step is to determine how much of that is liquid. This refers to available cash or assets that can be accessed quickly. Franchisors usually emphasize liquidity since early-stage costs need to be covered before revenue becomes stable.
Keep in mind that the franchise fee is only one part of the total investment. Most new franchise owners also budget for:
- Real estate or lease deposits
- Buildout or renovation
- Fixtures, equipment, and signage
- Initial inventory and supplies
- Staff hiring and training
- Marketing and launch activities
- Operating costs for the first few months
Understanding your financial capacity gives you a solid starting point when speaking with franchisors or lenders. It also helps you focus on franchise opportunities that match your resources and reduces the likelihood of taking on more than you can manage.
Start with the Franchisor
One of the first places to check for financing support is the franchisor itself. Many franchise systems offer in-house financing or work with preferred lenders who understand their business model and costs. These relationships can help streamline the loan process, especially if the lender is already familiar with the franchise disclosure document (FDD).
When evaluating a franchise, ask:
- Does the brand offer financing for the franchise fee, equipment, or buildout?
- Are there partnerships with banks or alternative lenders?
- Will the franchisor provide assistance preparing loan applications?
- What kinds of financing do current franchisees typically use?
Even if the brand does not provide loans directly, many offer financial planning resources, introductions to lenders, or guidance on where to look next. Some may assist with real estate or construction financing as part of their support package. These early conversations can help you better understand what outside funding you’ll still need to secure on your own.
SBA Loans
Loans backed by the U.S. Small Business Administration (SBA) are among the most widely used financing tools for franchisees. The SBA doesn’t lend money directly, but it guarantees a portion of loans made by participating lenders. This reduces the risk for the lender and improves your chances of approval.
There are several SBA loan programs worth considering:
SBA 7(a) Loans
The 7(a) loan is the most flexible and commonly used SBA program for franchise funding. It can be used for many startup costs, including working capital, equipment, furniture, leasehold improvements, and even real estate in some cases.
Typical features:
- Loan amounts up to $5 million
- Terms up to 25 years depending on loan purpose
- Competitive interest rates set by lenders within SBA guidelines
Lenders often look for a solid business plan, good credit, and relevant experience. If the franchise is listed in the SBA Franchise Directory, it is more likely to qualify.
SBA 504 Loans
The 504 loan is intended for major fixed asset purchases like land and buildings, making it a suitable option for franchisees who plan to own rather than lease their locations
Structure:
- Typically combines funds from a bank and a Certified Development Company (CDC)
- Borrower contributes around 10 percent
- Offers fixed rates and long repayment terms
- Loan sizes can go up to $5.5 million or more for certain projects
These loans are not intended for working capital or inventory but may work well for franchise concepts that require major real estate or facility investment.
SBA Microloans
For lower-cost franchises or specific funding needs, microloans may be a good fit. These are offered through nonprofit lenders and tend to have more flexible credit criteria.
Key details:
- Loan amounts up to $50,000
- Average loan size is closer to $13,000
- Terms up to six years
- Can be used for inventory, supplies, working capital, or equipment
Microloans are often paired with business mentoring or technical assistance, which can be helpful for first-time business owners.
Other Ways to Finance Your Franchise
Outside of SBA programs and franchisor options, there are several other ways to finance your new business. Some are self-funded while others involve outside lenders or personal networks.
Personal Savings
Using your own money gives you full control and avoids monthly loan payments or interest. It also signals financial responsibility to franchisors and lenders. But it is important not to drain all of your reserves. Leave enough to handle personal expenses and unexpected costs after launch.
Retirement Rollovers (ROBS)
A Rollover for Business Startups allows you to use funds from a 401(k) or Individual Retirement Account (IRA) without early withdrawal penalties or taxes. It involves setting up a corporation and using retirement funds to buy stock in your new business.
This strategy is legal and commonly used in franchising but must follow Internal Revenue Service (IRS) rules. Most people work with providers who specialize in setting up and maintaining the structure. Using retirement savings comes with risk, so it’s important to consider the long-term implications.
Home Equity Loans or Lines of Credit
Homeowners who have built up equity may be able to borrow against it. This can be a fast way to access capital at relatively low interest rates.
However, the risk is significant. If the business struggles and loan payments fall behind, you could jeopardize your home. This option is best considered when there is strong confidence in the business model and a clear repayment plan.
Bank Loans and Business Lines of Credit
Traditional banks offer small business loans and credit lines, but these are often harder to qualify for without a strong credit history or collateral. Interest rates may be higher than SBA loans, and repayment terms may be shorter.
Still, some lenders specialize in franchise lending and may offer programs with streamlined approvals for well-known brands. Business lines of credit can also be helpful for covering short-term gaps in cash flow.
Friends and Family
Borrowing from personal networks is another option, especially if bank loans are out of reach. These arrangements can be informal or structured through legal agreements. If you choose this route, make sure everyone involved understands the risks and agrees on repayment terms.
Clear communication and written agreements protect both sides and help avoid misunderstandings later on.
Equipment Leasing or Vendor Credit
Some suppliers offer financing for large equipment or fixtures. Leasing may reduce upfront costs and preserve cash for other needs. Vendors may also offer payment terms for inventory or opening orders.
These arrangements can be helpful, but always review the long-term costs. Leasing can be more expensive over time, even if it reduces pressure at launch.
Crowdfunding and Online Lending Platforms
Some franchisees explore newer sources of funding such as crowdfunding or online lenders. Crowdfunding is more common for product-based businesses or franchise models with strong community appeal. Online lenders offer fast decisions, but interest rates and fees can be high.
These tools may work best when combined with other sources or used for specific, short-term needs.
Final Thoughts
Securing the right financing for your franchise is one of the most important steps you’ll take as a future business owner. It’s not just about having enough to open the doors. It’s about knowing you can cover the business through early growth and handle any unexpected costs along the way.
Before choosing a funding method, take time to understand your financial position, clarify your total startup costs, and explore every option available to you. A well-prepared funding plan puts you in a stronger position with both franchisors and lenders. More importantly, it gives your business the financial foundation it needs to succeed.
Sources:
- U.S. Small Business Administration (SBA) – 7(a) Loan Program
https://www.sba.gov/funding-programs/loans/7a-loans - U.S. Small Business Administration (SBA) – 504 Loan Program
https://www.sba.gov/funding-programs/loans/504-loans - U.S. Small Business Administration (SBA) – Microloan Program
https://www.sba.gov/funding-programs/loans/microloans - Whiteford Taylor Preston LLP – SOP 50 10 8 Update for SBA 7(a) Loans
https://www.whitefordlaw.com/news-events/client-alert-sba-issues-sop-50-10-8-key-changes-impacting-sba-7a-lending - NerdWallet – SBA Loan Down Payment Requirements
https://www.nerdwallet.com/article/small-business/sba-loan-down-payment - Investopedia – SBA 504 Loan Guide
https://www.investopedia.com/sba-504-loan-7551278