How to Attain Financing for Franchise Construction or Renovation

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A franchise unit owner works with a loan officer to obtain a loan for construction

There are many costs to starting a franchise unit. After the franchise fee, one of the most significant costs is in acquiring, constructing, or renovating the real estate that will house your new business. Wondering how you’ll cover your franchise construction or renovation costs? Let’s explore some options.


Checking and savings accounts

The money you’ve accumulated in these kinds of accounts is the easiest to access and use for acquiring or improving a property. Many owners use this pool of cash before considering any other sources of capital.

If you have cash available in either of these kinds of accounts, calculate how much you’re willing to part with to buy, build, or improve a piece of property.

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 might consider selling them or borrowing against them with a portfolio loan to cover your real estate costs. Here’s what each of these options might look like:


Sell them

Selling your stocks, bonds, or mutual funds is a relatively straightforward process. By selling your securities, you could a good bit of the cash you need to buy or improve a piece of property.

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

In a portfolio loan, which is sometimes called a pledged asset line, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the cash value of your accounts. Because these loans are backed by collateral, they tend to 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 securities and the risks of borrowing against them.


Personal lines of credit

Your bank or credit union may help you 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 that you can borrow and repay according to your lender’s terms.

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

Are you interested in this form of funding? Contact a local bank or credit union or an online lender to learn more.


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 keep in mind that any use of your retirement savings introduces risk, and in some cases, significant taxes and penalties.

For more information about using your retirement plan to cover real estate costs, check out this guide:


Home equity

Do you own a home or other properties? You might 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 few 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 you could lose your home if you fail to repay the loan.

Be sure to speak with a banker before considering this loan to cover the costs of your business.


Cash-out mortgage refinance

Another option is refinancing a 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 the property’s 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 consider a second mortgage on a property you own to cover your real estate 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. You should speak with a banker before considering a second mortgage.


Term loan

Many owners apply for term loans to cover some of their real estate acquisition or improvement 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, check out this guide:


Franchisor financing

Franchisors may offer you financing or an allowance to buy, build, or improve a site. 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 franchise begins operations.

You can learn more about franchisor financing in this guide:


SBA loan

SBA loans are one of the most popular ways to finance the purchase of a franchise unit. 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, and the purchase of long-term machinery.

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.

Want to learn more about SBA loans? This guide can help:


Asset-backed financing

Many lenders offer asset-backed loans to owners who are willing to leverage their business’s 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, take a look at this guide:


Commercial mortgage

You might consider a commercial mortgage for your franchise to cover the costs of real estate acquisition, construction, or renovation. This form of loan can be used to buy an owner-occupied office building, retail center, warehouse, or other commercial property.

Commercial mortgages differ from residential mortgages in both term length and the amortization period. Commercial mortgage 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 sometimes require higher down payments than SBA-backed options. They can also be slightly more difficult to attain. In addition, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with a limited borrowing history.

You can learn more about commercial mortgages and real estate loans in this guide:


If you’re interested in a commercial mortgage, speak with a bank or credit union lender in your area.


Commercial bridge loan

Some lenders offer short-term commercial bridge loans, or gap financing, to owners who want to buy a commercial property and refinance it into a mortgage at a later date. Most bridge loans offer terms between 6 and 36 months and require a down payment of at least 10 percent of the loan to value. However, the terms can vary greatly by lender. You may find options for interest-only payments and nonrecourse loans in which the borrower does not have to guarantee the loan. These forms of bridge loans can be especially attractive options for short-term cash needs.

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 business owners to purchase a property quickly, with flexible terms, and often without checks to their credit history. However, the interest rate on these loans is usually high. Many borrowers view these loans as a last-resort option and refinance them 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. As with the other options we mention here, be sure to evaluate the terms carefully before proceeding.


Equipment leasing

Many franchises require expensive equipment for daily operations. Because of this, your equipment needs should factor into your upfront real estate and improvement costs.

Rather than buying and leveraging the equipment you need to operate, look into leasing large-ticket pieces of equipment. Your franchisor might offer an equipment lease program, or they may be able to refer you to a leasing partner who’s familiar with the franchisor’s requirements.

Many equipment wholesalers and distributors offer five-year leases. Some also provide the option of buying the equipment at the end of the lease period.

For more information on equipment leasing, read this Small Business Financing 101 article:



If you find you can’t raise enough cash through these options or you aren’t comfortable tapping into a significant portion of your savings or equity, consider bringing on a partner who can help you cover your franchise construction and renovation costs.

There are risks and benefits to partnership, which should be considered carefully before proceeding. It’s also important to note that franchisors will want to know about any person (or entity) that will 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.

Want learn more about forming a partnership? This guide can help:


What’s next?

Before selecting any financing option, you should speak with both your franchisor and a banker. Your franchisor can help you explore your options and explain which options have worked well for other franchise unit owners. Your banker can help you evaluate the financing options that will help you raise the cash you need and minimize your risk exposure.

Interested in connecting with a banker? Check out these options:


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Commercial Loan Direct

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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.


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