Your Go-to Guide to Financing a Franchise

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Katie Fleming

Co-founder and COO of Owner Actions

A storefront that may be one element an owner should consider when developing a plan for financing a franchise

Franchise fees, real estate, equipment, and inventory are some of the many costs you’ll need to cover when starting a franchise unit. Together, those costs can be substantial, and to a person with limited cash on hand, they can seem insurmountable. Fortunately, there are lots of options for financing a franchise.

In our guide, What It Costs to Buy a Franchise Unit, we discussed eight costs to consider when evaluating and comparing franchise units. For a quick recap, these are:

  1. Franchise fees
  2. Royalty payments
  3. Advertising fees
  4. Real estate and related costs
  5. Signage
  6. Equipment
  7. Initial inventory
  8. Working capital


Here, you’ll learn about the financing options you can use to cover those costs.

But first…


How much cash do I need?

In most cases, franchisors will state a specific amount of non-borrowed cash you need to have on hand to invest in a franchise unit. This cash is generally used to cover the franchising fee (which can range from thousands of dollars to hundreds of thousands of dollars) that’s due immediately after signing a franchise agreement and a few other nominal costs.

This begs the question…


How can I raise enough cash?

There are quite a few ways to come up with the cash you need to cover a franchisor’s cash-in-hand requirements. Let’s dive into the most popular options.


Checking and savings accounts

Many prospective franchise owners use this pool of cash before considering any other cash sources because it’s the easiest to access and use. If you have cash available in either of these kinds of accounts, calculate how much you’re willing to part with. You can contact a banker for help with these calculations.


Investment accounts

Do you own stocks, bonds, or mutual funds in a taxable investment account? You could use them in to cover the franchising fee and other upfront franchise costs. Here’s how:


Sell them.
By selling your securities, you could raise some of the cash you need for your investment. Keep in mind that sales can result in mutual fund fees, broker commissions, and the realization of capital gains. Be sure to speak with a qualified investment professional before proceeding with this option.


Borrow against them.
You might also consider a portfolio loan (sometimes called a pledged asset line) to raise the cash you need for your investment. Through a portfolio loan, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the value of your accounts. Because these loans are backed by collateral, they usually have low interest rates and are relatively easy to qualify for, provided you can meet the funding minimum your lender requires.

You can learn more about portfolio loans here:


Speak with a banker to navigate the tax consequences of selling your securities and the risks of borrowing against them.


Personal lines of credit

Few banks will lend money to cover franchising fees, but many will allow you to set up a personal line of credit to use however you see fit. A line of credit provides access to a predetermined amount of cash you can borrow and repay according to the terms your lender provides.

This option involves some degree of risk. Failure to repay the funds you borrow could negatively impact your personal credit score. It can also keep you from attaining favorable terms on any loans you need to take out in the future.

If you’re interested in this form of funding, contact a local bank or credit union or work with an online lender.


Retirement plans

Have you been contributing to a retirement savings account? You may be able to use those funds to cover some of your upfront expenses. There are several ways to access the funds in your retirement savings accounts, but it’s important to note that any use of your retirement savings introduces risk, and in some cases, tax concerns.

For more information about using your retirement plan to cover a cash-in-hand requirement, check out this guide:


Home equity

Do you own a home or other properties? You may be able to borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and minimal restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral. This means that you could lose your home if you fail to repay a home equity loan.

Be sure to speak with a banker before considering a home equity loan for financing your franchise.


Cash-out mortgage refinance

Another option is refinancing your home or property mortgage to secure the funds you need. With a cash-out mortgage refinance, you can pocket the difference between what you owe on a property and 80 to 95% of its full appraised value.

Rates and closing costs can be higher with this option than a traditional refinance, so this option should be considered carefully before moving forward. Speak with a banker to learn more.


Second mortgage

You might also consider a second mortgage on a property you own to cover your upfront costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.

Keep in mind that it can be difficult to find a lender willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money. Those that offer them tend to charge higher interest rates than they might for a traditional home mortgage. Be sure to speak with a banker before considering a second mortgage.



If you find that you can’t raise enough cash through other means—or you aren’t comfortable tapping into a significant portion of your savings or equity—consider bringing on a partner who can help you meet the franchisor’s cash-in-hand requirements.

Similar to the options above, there are risks and benefits to partnering. These should be considered carefully before proceeding.

It’s also important to note that franchisors will want to know about any person (or entity) that wants to claim an ownership stake of a franchise unit. Be sure to discuss this option with your franchise rep to learn what’s feasible and how you might navigate a shared ownership arrangement.

For more information on forming a partnership, read this guide:


What should I do to cover the remaining expenses?

After meeting a franchisor’s cash-in-hand requirements, you may need to raise more money to cover other costs, including real estate, equipment, inventory, and working capital. Here are some of the funding options you could consider when financing your franchise:


Franchisor financing

A franchisor may offer loans that cover part of your upfront costs or help you build the liquidity you need to begin operations.

Most often, franchisor financing is structured very similarly to a term loan with agreements for repayment and interest over a set period of time. Some may offer interest-only loans or loans with a balloon payment that’s due months or years after the unit begins operations.

To learn more about franchisor financing, check out this guide:


Term loan

Many prospective owners apply for term loans to cover part of their startup costs.

Term loans, which can be attained through a bank, credit union, or online lender, often have favorable terms and long repayment schedules. However, they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.

To learn more about term loans and their qualifications, read this guide:


SBA loan

SBA loans are often used for financing a franchise. Named after the Small Business Administration that guarantees them, these loans allow buyers to finance a large portion of their startup costs, working capital expenses, equipment needs, and building acquisition or improvements.

The SBA offers three kinds of 7(a) loans to owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, or the purchase of long-term machinery.

Here’s something you need to know. Not every franchise is eligible for SBA financing. Visit the SBA Franchise Directory to see if your franchisor has been approved before moving forward with this option.

You can learn more about SBA loans and their requirements in this guide:


Asset-backed financing

Many lenders offer asset-backed loans to owners who are willing to leverage their business’s valuable assets. Through these loans, you can finance your new business’s inventory, machinery, non-mortgaged real estate, or other tangible assets to access fast funding.

Asset-backed loans are often easy to qualify for and attain, even for borrowers with less-than-perfect credit. To learn more about asset-backed financing, check out our guide:


Equipment leasing

Many franchises require expensive equipment for daily operations. Because of this, your business’s equipment needs should factor into your franchise cost planning.

Rather than buying and leveraging the equipment your franchise needs to operate, consider leasing large-ticket items. Some franchisors offer an equipment lease program. Others might refer you to a leasing partner familiar with the franchisor’s equipment requirements. Some of their partners could offer five-year leases and provide the option to buy the equipment at the end of the lease period.

Speak with your franchisor to learn about your leasing options. Then, check out this guide:


Commercial mortgage

If you’d rather buy than lease the property you need for your business, consider a commercial mortgage. This form of loan can often be used to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.

Commercial mortgages differ from residential mortgages in both terms and the amortization period. Terms often range from five to twenty years, and the amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make monthly installment payments for the life of the loan and a final balloon payment.

These loans may require higher down payments than SBA-backed options. They can also be slightly more difficult to attain. Further, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with no borrowing history.

You can learn more about these mortgages here:


Commercial bridge loan

Bridge loans can be a good option for covering commercial real estate costs and other high-ticket items, including large batches of inventory, renovations, or repairs. These loans can often be attained quickly and relatively easily, even for borrowers who have less-than-perfect credit. These loans are collateralized, so lenders tend to worry less about a borrower’s credit history and credit score. However, most will still require a credit check for loan approval.

To learn more about this option, check out this guide:


Commercial hard money loan

Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows owners to buy a property quickly, with flexible terms, and often without checks on their credit history. However, the interest rate on these loans is usually high. Because of this, many borrowers view them as a last-resort option and refinance the loan into a mortgage at a later date.

Some online lenders offer hard money loans, but most owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a hard money loan carefully before proceeding with this option.

Before choosing any financing option for a franchise unit, speak with both your franchisor and a banker. Your franchisor can talk you through your options and explain what’s worked well for others. A banker can explain the best options to raise the cash you need and minimize your risk exposure.

Interested in connecting with a banker? Check out these banks and get connected with a banker:

Play Video

Commercial Loan Direct

Business Loans Made Simple

Commercial Loan Direct is a no-frills lender that provides conventional loans, SBA loans, construction loans, bridge loans, and other forms of financing to help business owners go after their goals. Many owners start with CLD’s Commercial Loan Finder, a tool that points them in the direct of loan programs that best suit their needs. Interested in learning more? Visit their website through the link below to get started.

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Quick Business Loans to Help All Businesses Grow

With their simple, streamlined two-minute application, GoKapital makes it easy to apply for financing. GoKapital offers a wide range of financing options. These include business cash advances, equipment financing, unsecured loans, and no credit check loans. They also offer more traditional loan products that, on average, close in two-to-four weeks. Ready to explore their loan options? Click the button below to get started.

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Square Banking

Money to Keep Your Business Moving Forward

Square offers checking accounts, savings accounts, and loan products exclusively to owners who process with Square. Their loans, which are backed by your card sales through Square, charge a flat fee (no interest) and are repaid automatically with a percentage of your daily card sales. Would you like to learn more about this new way to finance your expenses? Follow the link below to explore the offer.


What’s next?

Once your financing is in place, you’ll move into a new stage of the franchise acquisition process: preparing for operations. You will attend franchisor training, secure a site, hire your team, and plan for your grand opening.

We can help you with every part of your preparations. Log into your owner’s portal for a free step-by-step guide to make your venture a success.

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