The Best Business Loans for Franchise Purchases and Improvements

business loans for franchise

Are you exploring business loans for franchise purposes? You’re likely bringing some of your own money to the table to finance your dream. However, that doesn’t mean that you won’t need help with other startup costs, future expansion or ongoing funds. You might be surprised at how many options there are in the marketplace. This guide will help get you up to speed on the most popular franchise financing options according to two main objectives: buying a first/additional/multiple franchises and funding existing franchise operations.

Get ready to feel better about your financing options for the next chapter in your entrepreneurial career. Your franchise ownership goals are within reach.

Buying Your First/Additional/Multiple Franchise Locations

Whether you’ve got your eye on owning your part of a franchise or ready to expand your franchise footprint, you’ll need one of the many flexible-use business loans for franchises.

The three most popular types of franchise financing are:

  • Traditional loans
  • Small Administration (SBA) loans
  • Franchisor financing

Look at how each of these financing options can fit the needs specific to someone purchasing an initial franchise.

Traditional loans

When considering the different business loans for franchises, traditional business loans top the list. Proceeds can help purchase or expand franchise holdings.

Traditional loans are smart financing options for small business owners confident that they have the financials and good credit to qualify. With generous loan limits, highly competitive interest rates, and flexible terms, these loans will likely offer some of the best rates in the market. You’ll need to come to the table equipped with solid financials. The rigorous underwriting process is one of the reasons these loans typically offer the most competitive terms. Traditional loans might be an attractive option. Show three years of tax returns, a strong personal financial history and a good credit score. The lender will verify fund source you’re using for your down payment.

With traditional loans, your franchise choice could play a significant role in the approvals process. Lenders like to see big brand names with proven track records in the market. Franchises with few locations might hurt your application. These franchises haven’t worked in multiple markets and various economies. Yet, if you’re a new franchise owner, a traditional loan can use your personal credit and financial history to launch your new venture.

SBA 7(a) loans

The SBA 7(a) loan program is hands-down the most popular loan program. It’s a reliable option for financing franchise startup and expansion costs. When you use these types of business loans for franchises, you’ll find competitive rates and virtually unlimited use of funds. Loan Limits are generous, and flexible terms are perfect for a franchise on the rise.

The first step to qualify for an SBA (7a) loan is to make sure your franchise is listed in the SBA Franchise Directory. If they don’t list your franchise type, you can apply for participation in the directory (note: the SBA will require additional documentation).

Loan limits are up to $5 million and terms range from 10 to 25 years. Interest rates are generally in the single digits (7% to 9.5% is a good range to consider). Prospective borrowers will usually have to be in business for at least two years. This makes the SBA 7(a) loan a better match for existing franchise owners, or those purchasing a franchise in an industry where they have a proven career track record. Lenders will use your credit score and business financials for qualification. While the approvals process isn’t speedy, you’re rewarded with some of the best rates and terms, aside from traditional loans.

The only limit to an SBA 7(a) loan is borrowers can’t use the funds to finance franchise or royalty fees. If you choose to go the SBA 7(a) route, make sure you earmark other funds for these startup costs.

Franchisor financing

Many of the nation’s leading franchises offer direct financing to entrepreneurs. Of course, they want to make it simple for owners to get up and running. This one-stop-shop approach is potentially perfect for those looking to open their first location, adding a location, or purchasing multiple locations at once.

While the rates might not be as competitive as traditional loans or the SBA 7(a) loan, there’s something to be said for a streamlined process. As you consider all the options for business loans for franchises, it’s worth it to speak to the franchise and see what options are available. Be sure to have your attorney or accountant review any financing options offered by the franchise. Then you can compare the terms between a traditional loan, SBA 7(a) loan and the franchise’s direct financing side-by-side.

Funding Ongoing Franchise Operations

You may find times where you need a cash infusion to help fuel operations and growth. The best business loans for franchise needs in these cases is the one that matches:

  • The reason you need the funds
  • How long you need to repay the funds
  • How much you need to borrow

Here are three financing options franchises can use to keep operations running smoothly and make specific improvements.

Traditional business loans

If you know you need a fixed amount of cash for an upcoming franchise improvement or expansion expense, a traditional business loan can help. With fixed terms and rates, small business owners can fund franchise expenses with a predictable impact on their monthly budget.

Repayment terms are often flexible, including payment frequencies based on your current cash flow. Traditional loans have stringent qualification guidelines, and not all businesses can qualify with ease. You’ll need to have existing operations with a proven balance sheet, a plan, and your financials in order.

Lines of credit

If you’re looking for a more flexible way to access the cash your franchise needs, a line of credit might be the ideal tool.

Lines of credit can be used for nearly every purpose imaginable. You can draw as much or as little as needed–and only pay interest on the funds drawn. Once you pay it back, your credit line is once again fully available for use. There’s no need to go through the qualification process again.

For businesses that may not qualify for a traditional loan, lines of credit can fill that financing gap. Credit scores aren’t weighed as heavily in the approval process for most lines of credit, either. These features combined make lines of credit ideal to fund everything from cash flow gaps to seasonal inventory ramp-ups. The sky’s the limit.

SBA 504/CDC loans

While the SBA 7(a) loan is an ideal fit for initial or additional franchise purchases, you’ll need a different SBA loan type for funding ongoing business concerns.

The SBA 504/CDC loan has a narrow scope of use. Funds must be used for acquiring, renovating, or improving real estate or equipment. A borrower’s franchise location must also be U.S.-based. This type of loan can help fund making improvements to franchise real estate, buying real estate, or even upgrading heavy equipment to speed operations.

As with the SBA 7(a) loan, your franchise needs to be listed in the SBA Franchise Directory to be eligible. While these loans are slower to fund than traditional bank loans and lines of credit, you’ll likely be rewarded with some of the best interest rates. With all of the options for business loans for franchises, there’s one out there that makes perfect sense for your financials, credit and goals. And, if you’re still trying to determine the next steps in your franchise financing plans, you can always reach out to a loan officer to discuss.


Get Started Today

Let’s get you the financing you need to grow your business. Whether you’re looking to expand, purchase equipment, fulfill an order or stabilize your cash flow, we can get you the right type of financing for your needs. If you’re still not sure which type of financing is right for you, you can use our matching tool or give us a call at (800) 780-7133 to speak with one of our financing specialists.

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