Almost nobody writes one check. Most franchise purchases are a stack – some cash, some borrowed, sometimes some retirement money, and the way you assemble that stack has more effect on your first two years than the brand you choose.
Before comparing loan products, find your equity injection – the cash you personally put in, unborrowed.
For an SBA-backed loan on a new business or a full change of ownership, the SBA’s current standard operating procedure (SOP 50 10 8, effective June 1, 2025) requires a minimum of 10% of total project cost. “Total project cost” means everything required to become operational – franchise fee, build-out, equipment, initial inventory, and working capital, not just the franchise fee.
Two things people get wrong about that 10%:
It’s a floor, not a target. Individual lenders routinely want 15-30% on a startup franchise, especially in categories they consider higher-risk. The SBA sets the minimum; the bank sets the price of saying yes.
Where it comes from is regulated. The SBA accepts unborrowed cash, retirement funds properly rolled over, gifts without repayment obligations, verified prepaid expenses, and properly valued non-cash assets. A seller note can count toward equity only if it’s on full standby for the life of the SBA loan, and only for up to half the required injection. A personal loan counts only if you can service it from income outside the business.
So the first question isn’t “which loan?” It’s “what can I put in, and can I document where it came from?”
The most common way franchises get funded in the U.S., and the reason franchising is accessible to people without large balance sheets.
How it works: A conventional bank or non-bank lender makes the loan; the SBA guarantees a large share of it, which is what makes the bank willing to lend against a business that doesn’t exist yet.
The shape of it:
– Maximum loan amount: $5 million
– Equity injection: 10% minimum, lender often wants more
– Maturity: roughly 10 years for working capital and equipment, up to 25 years when real estate is involved
– Rate: variable, set by the lender against a base rate (usually Prime) with an SBA-capped spread that tightens as the loan gets larger – from base + 6.5% on the smallest loans down to base + 3.0% on loans above $350,000
– SBA guaranty fee: scales with loan size and is usually financed into the loan rather than paid out of pocket
– Personal guarantee: required from anyone owning 20% or more
– Collateral: expected where available, including a lien on your home if you have meaningful equity in it
Franchise-specific wrinkle worth knowing. The SBA eliminated its Franchise Directory in 2023, then reinstated it effective June 1, 2025 under SOP 50 10 8. The practical effect: the brand you’re buying generally needs to appear on the SBA Franchise Directory for the loan to proceed, and SBA, not your lender makes that eligibility call. It’s a fast thing to check early, and discovering a brand isn’t listed after you’ve spent three months in diligence is an avoidable kind of pain. Listing is not an endorsement; it only means the franchise agreement clears SBA’s eligibility criteria.
Timeline: 45–90 days from complete application to funding. Start it during Stage 5, not after you sign.
Fits: Most first-time franchise buyers with decent credit, documented income history, and 10-30% cash.
Costs you: Personal guarantee, likely a lien on your house, 10 years of debt service starting before the business is profitable.
A different instrument for a different purpose. If you’re buying or building the building, not just the business.
Fits: Brick-and-mortar franchisees purchasing their location rather than leasing.
Doesn’t fit: Service and mobile franchises, and anyone who needs working capital – which is most first-time buyers. Many deals pair a 504 for the real estate with a 7(a) for everything else.
Rollovers as Business Start-Ups. You form a C corporation, the C corp sponsors a new retirement plan, you roll your existing 401(k) or IRA into that plan, and the plan buys stock in the C corp. The company now has cash; you took no distribution, so there’s no early-withdrawal penalty and no income tax event.
Why people use it: It converts retirement savings into equity injection – including the injection an SBA lender requires. That’s the combination that makes it common in franchising: ROBS for the down payment, SBA 7(a) for the rest.
Why the IRS watches it closely. This is a legal structure, and the IRS says so – but its own ROBS compliance project found that most ROBS-funded businesses either failed or were heading that way, and identified recurring problems: sponsors amending the plan to block other employees from buying stock (a nondiscrimination violation), promoters charging inflated fees, and valuation disputes. ROBS plans must file Form 5500 annually – the one-participant exemption doesn’t apply, because the plan owns the business rather than you owning it personally. Once you have employees, they generally must be allowed to participate.
What it costs: Typically $4,000-$5,000 to set up and $130-$200 a month in ongoing plan administration, through a specialist provider. Doing this without one is not advisable.
The real risk, stated plainly: if the business fails, you lost retirement savings that were protected from creditors and were compounding tax-deferred. That’s a materially different outcome from defaulting on a loan. People do use ROBS successfully and it’s a legitimate tool – but the amount you put through it should be an amount you could genuinely lose without changing your retirement plans.
Fits: Buyers with $75,000+ in a rollable retirement account who want to avoid or reduce debt, or who need to manufacture an SBA equity injection. Talk to first: A CPA who has no financial interest in you doing it.
Borrow against your house at real-estate rates rather than business-loan rates. Usually the cheapest money available to an individual, and lenders don’t scrutinize your business plan because the collateral is the house.
Fits: Buyers with substantial home equity and a lower total investment – many home-services and mobile franchises land in a range this can cover outright.
Costs you: Your home is the collateral, explicitly. The SBA loan already puts a lien on it in most cases; this makes it the primary security. Variable-rate HELOCs also reprice, which can compound exactly when a new business is at its tightest.
A loan against a taxable brokerage portfolio, without selling the positions. You avoid realizing capital gains, rates are typically well below unsecured business credit, and there’s no underwriting of the business itself.
Costs you: Margin-call risk. If the market falls far enough, the lender can require repayment or liquidate your positions – potentially at the bottom, and potentially while your new business is also under strain. Correlated risk is the danger here.
Fits: Buyers with meaningful taxable investments who want speed and don’t want to sell.
Vehicles, kitchen equipment, machinery, and technology financed separately, secured by the equipment itself.
Why it matters even when you have an SBA loan: it preserves working capital, which is the thing new franchises most often run out of. Carving equipment out of the main loan and financing it separately can meaningfully lower the cash you need at opening. Franchisors frequently have preferred-vendor programs with negotiated terms.
Fits: Almost any equipment-heavy concept, as one layer of the stack rather than the whole thing.
Item 10 of the FDD discloses whether the franchisor offers financing, and what it looks like. In practice this is usually partial – deferred or financed franchise fee, equipment financing, or a reduced fee for a second unit – rather than full funding.
Franchisors also maintain relationships with SBA lenders who already know the brand and its unit economics. A lender who has closed thirty loans on a system underwrites the thirty-first faster. Ask the development team for their lender list; it’s one of the more useful things they hand out.
Veterans: The VetFran program, run by the IFA Foundation, has member brands offering tiered discounts on the initial franchise fee – a minimum of 10%, 15%, or 20% depending on the brand’s participation tier. It’s free to use and open to veterans, transitioning service members, and military spouses. If you’re eligible, check a brand’s VetFran status before you negotiate anything.
For a $250,000 total project cost on a home-services franchise, a common structure looks like:
| Source | Amount | Share |
|---|---|---|
| Personal cash | $25,000 | 10% |
| ROBS rollover (equity) | $37,500 | 15% |
| SBA 7(a) loan | $162,500 | 65% |
| Equipment lease (vehicles) | $25,000 | 10% |
| Total | $250,000 | 100% |
Illustrative only. Your structure depends on your assets, credit, the brand, and your lender.
Knowing what you can comfortably fund narrows the field faster than anything else. Set your investment range on the map and see what actually fits – startups and existing businesses both.
Nothing on this page is legal, tax, or financial advice. Loan terms, SBA rules, and rates change; verify current figures with the SBA and your lender. Talk to a CPA before using retirement funds for any purpose.
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