SBA Loan for Franchise Purchase: Requirements & Process

If you are considering opening or purchasing a franchise, an SBA loan for franchise purchase may help finance an eligible project.

SBA 7(a) financing can potentially support a new franchise location, the purchase of an existing franchise business, equipment, inventory, working capital, real estate, and other eligible project costs.

However, franchise financing has an additional requirement that ordinary business financing may not have:

The franchise brand itself must satisfy current SBA franchise eligibility requirements.

That makes the SBA Franchise Directory one of the first things a prospective franchise buyer should understand.

Can You Use an SBA Loan to Buy a Franchise?

Yes.

SBA 7(a) financing can be used to start a qualifying business or finance an eligible change of ownership.

For a franchise transaction, that can include situations such as:

• opening a new franchise location
• purchasing an existing franchise unit
• acquiring an operating franchise business
• buying qualifying equipment
• purchasing inventory
• financing eligible working capital
• acquiring or improving qualifying real estate
• paying eligible costs associated with opening or purchasing the business

The exact financing structure depends on whether the project is a startup, an acquisition, or another type of transaction.

The borrower, franchise brand, project costs, equity contribution, creditworthiness, repayment ability, and lender underwriting must all satisfy applicable requirements.

What Is the SBA Franchise Directory?

The SBA Franchise Directory is SBA’s list of franchise and similar brands that SBA has reviewed for eligibility for its financial-assistance programs.

For brands that meet the Federal Trade Commission’s definition of a franchise, SBA currently requires the brand to appear in the Directory before the franchise can obtain SBA financing.

The Directory helps participating lenders determine whether the franchise relationship itself satisfies SBA eligibility requirements.

That can reduce duplication during the lender’s franchise-eligibility review.

But Directory placement does not mean:

• SBA recommends the franchise
• SBA approves the franchise as a good investment
• the franchise is financially successful
• the borrower will qualify for financing
• the lender is guaranteed to approve the transaction
• the franchise model has been endorsed by the federal government

SBA specifically states that placement in the Directory is not an endorsement or approval of the brand and does not ensure business success.

How Do You Check Whether a Franchise Is SBA Eligible?

Before committing significant money to a franchise project, check the current SBA Franchise Directory.

Search for the exact franchise brand rather than assuming that a well-known brand automatically qualifies.

Franchise eligibility can change, and the Directory is updated as SBA reviews brands and documentation.

A prospective borrower should also make sure the lender is reviewing the correct franchise entity and agreement for the proposed location.

Do not rely only on:

• the franchisor’s marketing materials
• an old SBA list
• a franchise broker’s statement
• a prior franchisee’s SBA loan
• a website claiming that a franchise is “SBA approved”

The current Directory is what matters for SBA franchise eligibility.

What If the Franchise Is Not in the SBA Directory?

This is an important distinction.

If SBA determines that a brand meets the FTC definition of a franchise, the brand must be placed in the SBA Franchise Directory to obtain SBA financing.

An unlisted franchise generally cannot simply bypass that requirement because a lender is willing to manually review the franchise agreement.

Instead, the franchisor may need to submit the appropriate franchise documents to SBA for review.

That can include the Franchise Disclosure Document, franchise agreement, and other agreements an SBA applicant may be required to sign.

The franchisor should address Directory eligibility early so a borrower does not spend weeks underwriting a transaction that cannot yet proceed.

Does Being in the SBA Franchise Directory Make Approval Easier?

It can simplify one specific part of the eligibility process, but it does not eliminate underwriting.

Directory placement addresses the franchise relationship and SBA franchise eligibility.

The lender still has to evaluate the borrower and the project.

That can include:

• creditworthiness
• repayment ability
• borrower liquidity
• equity contribution
• management experience
• business plan
• projections
• franchise costs
• working-capital needs
• collateral
• personal guarantees
• location
• lease terms
• franchise economics
• overall project feasibility

A listed franchise is therefore not a shortcut around credit or underwriting.

SBA 7(a) vs. 504 for a Franchise

The two programs serve different purposes.

SBA 7(a)

7(a) is generally the more flexible program for a franchise project because eligible proceeds can potentially support multiple business needs.

Depending on the approved transaction, these may include:

• startup costs
• franchise acquisition costs
• working capital
• inventory
• furniture and fixtures
• equipment
• leasehold improvements
• qualifying real estate
• other eligible business expenses

Most SBA 7(a) loans have a maximum loan amount of $5 million.

SBA 504

SBA 504 financing is primarily intended for qualifying major fixed assets.

A franchise project involving owner-occupied commercial real estate or long-term equipment may potentially fit 504 financing.

However, 504 is not a general working-capital or inventory program, and contribution requirements can differ for startup and special-purpose projects.

The appropriate program depends on what the franchise project actually needs to finance.

For a broader comparison of the two programs, see our SBA 7(a) vs. 504 loan comparison.

How Much Down Payment Is Required for a New Franchise?

For SBA purposes, a new franchise location will often be treated as a startup business.

Under the currently effective SBA 7(a) rules, a business that has been generating revenue from its intended operations for one year or less is considered a startup for purposes of the equity-injection requirement.

SBA currently requires an equity injection of at least:

10% of total project costs

for a 7(a) loan made to a startup business.

Total project cost is broader than simply the franchise fee.

Depending on the transaction, it can include the costs required to get the franchise operational.

A lender may also require more than the SBA minimum depending on its underwriting and the strength of the project.

So “SBA franchise loans require only 10% down” is too broad.

The more accurate statement is:

A qualifying startup franchise generally has a minimum SBA equity-injection requirement of 10% of total project costs under the currently effective 7(a) rules.

Certain qualifying expansions by an existing business may be treated differently under SBA rules, so an experienced multi-unit operator opening another location should not automatically assume the startup equity rule applies in the same way.

What If You Are Buying an Existing Franchise Location?

Purchasing an existing franchise unit is different from opening a brand-new location.

If you are buying an existing operating franchise, our guide to SBA loans for business acquisitions explains the broader change-of-ownership requirements in more detail.

If the transaction results in a complete change of ownership to a new owner, current SBA rules generally require an equity injection of at least 10% of total project costs.

The lender will also evaluate the historical performance of the existing franchise business.

That can include:

• revenue
• profitability
• operating cash flow
• existing debt
• franchise fees
• royalties
• occupancy costs
• payroll
• customer trends
• working-capital requirements
• valuation
• purchase price

An existing franchise may have operating history that a new location does not, but that does not automatically make the acquisition financeable.

How Much Can You Borrow for a Franchise?

Most SBA 7(a) loans have a maximum loan amount of:

$5 million

The actual amount a borrower can qualify for may be much lower.

The lender determines the appropriate amount based on the total project and the business’s ability to support the debt.

Factors may include:

• total project costs
• equity contribution
• projected cash flow
• historical cash flow for an existing location
• debt-service obligations
• borrower liquidity
• franchise fees
• buildout expenses
• equipment
• working capital
• real estate
• collateral
• lender underwriting

The $5 million program limit should not be confused with an automatic approval amount.

Can the SBA Loan Cover the Initial Franchise Fee?

Potentially.

An eligible SBA 7(a) project may include costs associated with establishing or acquiring the franchise business.

Depending on the approved structure, project costs may include items such as:

• initial franchise fee
• equipment
• furniture and fixtures
• leasehold improvements
• opening inventory
• working capital
• qualifying real estate
• other eligible startup or acquisition costs

The participating lender must approve the complete use-of-proceeds structure.

Borrowers should therefore build a full sources-and-uses budget rather than focusing only on the initial franchise fee.

What Credit Score Do You Need for an SBA Franchise Loan?

There is no single universal personal FICO score that guarantees or automatically prevents SBA franchise financing.

Participating lenders evaluate creditworthiness under their own credit standards and SBA requirements.

Depending on the lender and transaction, the review may include:

• personal credit
• business credit
• payment history
• existing debt
• liquidity
• debt obligations
• management experience
• repayment ability

The franchise brand’s strength does not replace the borrower’s credit evaluation.

Does SBA Still Require a 165 SBSS Score?

No universal current rule requires every franchise applicant to achieve a 165 SBSS score.

Effective March 1, 2026, SBA eliminated its use of the FICO Small Business Scoring Service score for 7(a) Small loans.

That change does not mean credit stopped mattering.

It means SBA stopped using that particular scoring process for those applications.

Participating lenders still need to evaluate creditworthiness and reasonable ability to repay.

What Are the Current SBA Citizenship and Residency Requirements?

Current SBA policy also places restrictions on applicant ownership.

Effective March 1, 2026, SBA requires 100% of an applicant’s direct and indirect owners, as well as all SBA-required guarantors, to be U.S. Citizens or U.S. Nationals with their principal residence in the United States, its territories, or possessions.

A lender should confirm ownership eligibility early in the process.

What Is a Franchise Disclosure Document?

The Franchise Disclosure Document, or FDD, is a legally required disclosure document that provides detailed information about the franchise system.

The Federal Trade Commission’s Franchise Rule requires franchisors to provide prospective franchisees with an FDD containing 23 categories of information.

Under federal rules, a prospective franchisee generally must receive the FDD at least 14 calendar days before signing a binding franchise agreement or paying money to the franchisor or an affiliate.

That review period is important.

Franchise financing should not be evaluated only from the franchisor’s sales presentation.

What Should You Review in the FDD?

The entire FDD deserves careful review, but several sections can be particularly relevant to financing.

These may include information regarding:

• initial franchise fees
• total estimated initial investment
• ongoing royalties and other fees
• territory
• franchisor support
• training
• required suppliers
• franchisee obligations
• litigation
• bankruptcy history
• renewal and termination
• transfers
• existing and former franchisees
• financial statements
• financial performance representations

A franchise attorney and accountant can help evaluate how those obligations affect the economics of the proposed business.

What Is FDD Item 19?

Item 19 addresses financial performance representations.

A franchisor is not required to provide prospective franchisees with sales or earnings projections.

However, if a franchisor makes financial performance representations, federal rules generally require those representations to be properly disclosed and supported through Item 19.

That makes Item 19 useful when it contains performance data—but borrowers should not assume every franchise provides an earnings representation.

Even when Item 19 includes performance information, it is not a guarantee that a new location will produce the same results.

Factors such as location, management, labor costs, rent, competition, financing costs, and local demand can materially affect performance.

What Does the Lender Review in a New Franchise Project?

A new franchise does not have its own operating history yet.

As a result, the lender may place significant emphasis on the project’s assumptions and the borrower’s ability to execute the plan.

Depending on the transaction, underwriting may review:

• borrower credit
• liquidity
• equity injection
• management experience
• franchise experience
• franchisor training
• business plan
• projections
• location
• lease
• buildout costs
• equipment
• staffing requirements
• franchise fees
• royalty obligations
• advertising fees
• working capital
• projected debt service

The existence of an established franchise system can provide useful information.

It does not eliminate the need to demonstrate that the specific location and borrower can reasonably support the proposed debt.

Do You Need Previous Industry Experience?

Not necessarily in every transaction.

A lender may consider:

• direct industry experience
• management experience
• transferable skills
• franchisor training
• prior business ownership
• staffing plan
• operating support
• transition plan

A strong franchise training program may help demonstrate preparedness, but it does not automatically replace management capability.

The lender evaluates the complete borrower profile.

Is Collateral Required for an SBA Franchise Loan?

Collateral treatment depends on the particular SBA delivery method, loan amount, available assets, and lender policy.

The lender may take security interests in business assets financed by the loan or other available assets when required.

But collateral and a personal guarantee are not the same thing.

Qualifying owners may still have personal-guarantee obligations even when the loan is not fully secured by collateral.

A borrower should review both requirements before closing.

For a deeper explanation of SBA collateral and personal-guarantee rules, see our guide to SBA loans without collateral.

What Interest Rate Will You Pay?

SBA 7(a) interest rates may be fixed or variable.

The borrower and participating lender negotiate the rate subject to SBA maximum-rate rules.

The final rate depends on factors including:

• loan amount
• maturity
• lender pricing
• applicable base rate
• fixed versus variable structure
• current SBA limits

Because market rates change, borrowers should not rely on an old article quoting a specific Prime Rate or APR range.

The actual lender proposal should show the current pricing.

How Long Are SBA Franchise Loan Terms?

The repayment term depends primarily on the approved use of proceeds.

SBA 7(a) terms are generally 10 years or less unless the loan finances assets that support a longer allowable maturity.

Qualifying real estate can support a maturity of up to 25 years.

Equipment with a longer useful life may also affect the allowable term.

A franchise project containing multiple uses of proceeds can therefore have a maturity determined by the approved financing structure.

How Long Does an SBA Franchise Loan Take?

There is no universal 45-, 60-, or 90-day closing guarantee.

Timing can depend on:

• Franchise Directory status
• borrower documentation
• credit underwriting
• projections
• equity verification
• franchise documents
• lease review
• business valuation for an acquisition
• appraisal
• environmental review
• lender workload
• SBA processing method
• closing conditions

A well-organized file may move more efficiently.

However, borrowers should avoid making a nonrefundable commitment based on an assumed SBA closing date unless the financing contingencies have been carefully reviewed.

What Documents May Be Required?

The exact documentation varies by lender and project.

A lender may request items such as:

Borrower documents

• personal financial statement
• personal tax returns
• resume
• ownership information
• credit authorization
• proof of equity contribution
• entity documents

Franchise documents

• Franchise Disclosure Document
• franchise agreement
• applicable addenda
• development agreement, when relevant
• territory information
• franchisor training information
• franchise fee information

Project documents

• business plan
• projections
• sources-and-uses schedule
• lease or proposed lease
• equipment quotes
• buildout estimates
• working-capital budget
• purchase agreement for an existing franchise
• business financial statements for an acquisition
• other lender-requested documentation

The participating lender determines the final package.

What Is the SBA Franchise Loan Process?

1. Confirm the Franchise Brand

Verify the brand’s current SBA Franchise Directory status.

2. Understand the Total Project Cost

Calculate the complete project rather than only the franchise fee.

This may include buildout, equipment, inventory, working capital, professional fees, real estate, and other approved costs.

3. Determine the Equity Requirement

For a new startup franchise, current 7(a) rules generally require at least a 10% equity injection of total project costs.

Existing-franchise acquisitions may involve change-of-ownership equity requirements.

4. Prepare the Borrower File

Organize personal financial information, credit information, ownership details, management background, and documentation showing the source of the required equity.

5. Review the FDD and Franchise Agreements

Understand franchise fees, royalties, restrictions, territory, training, renewal provisions, termination provisions, and operating obligations.

6. Build the Business Plan and Projections

The assumptions should reflect the actual proposed location and realistic expenses rather than simply copying franchisor marketing numbers.

7. Complete Lender Underwriting

The lender evaluates eligibility, creditworthiness, repayment ability, equity, collateral, franchise structure, documentation, and the overall project.

8. Complete Closing Requirements

Any remaining lender, SBA, legal, insurance, appraisal, lease, or third-party requirements must be satisfied before funding.

SBA Franchise Financing vs. Conventional Financing

Neither option is automatically better.

SBA financing may be worth considering when:

• the project meets SBA eligibility requirements
• a longer repayment term improves projected debt service
• startup costs require multiple eligible uses of proceeds
• the borrower can meet applicable equity requirements
• the franchise brand is SBA eligible

Conventional financing may deserve consideration when:

• the project does not meet SBA eligibility requirements
• the borrower wants fewer SBA-specific restrictions
• conventional terms are competitive
• documentation or timing favors another structure
• the financing need falls outside SBA rules

The correct comparison should be based on the actual numbers and transaction—not the assumption that one financing program always wins.

Common Mistakes Franchise Buyers Should Avoid

Do not assume:

• every franchise qualifies for SBA financing
• appearing in the Franchise Directory means SBA endorses the brand
• a Directory listing guarantees loan approval
• every franchise loan requires exactly 10% down
• every lender will accept only the SBA minimum contribution
• a franchise’s historical success guarantees a new location’s success
• there is a universal 165 SBSS requirement
• there is one universal minimum personal FICO score
• Item 19 guarantees future earnings
• a franchise can bypass the Directory through ordinary lender review
• every SBA franchise loan closes within a fixed number of days
• limited collateral means there is no personal guarantee
• the initial franchise fee represents the entire project cost

Understanding these distinctions before committing capital can prevent expensive surprises later.

SBA Loan for Franchise Purchase: The Bottom Line

An SBA loan for franchise purchase can provide financing for an eligible new franchise or the purchase of an existing franchise business.

For many projects, SBA 7(a) provides flexibility because approved proceeds may potentially cover multiple eligible needs such as franchise costs, equipment, inventory, working capital, and qualifying real estate.

But franchise financing involves two separate questions:

Is the franchise brand eligible for SBA financing?

and

Does the borrower and project qualify for the requested loan?

The SBA Franchise Directory helps answer the first question.

Lender underwriting answers the second.

A strong transaction still needs appropriate equity, realistic projections, adequate repayment ability, eligible ownership, acceptable creditworthiness, and a financing structure that complies with current SBA requirements.

Bright Side Capital helps business owners explore commercial financing structures based on the franchise project, borrower profile, funding purpose, timing, and repayment needs.

Complete our Business Survey if you would like to explore financing options for a franchise project.

Frequently Asked Questions

Can an SBA loan finance a new franchise?

Yes. SBA 7(a) can potentially finance an eligible startup franchise when the borrower, brand, project, and loan satisfy applicable SBA and lender requirements.

Can an SBA loan finance the purchase of an existing franchise?

Yes. A qualifying purchase of an existing franchise can potentially be financed as an eligible change-of-ownership transaction.

Does the franchise have to be in the SBA Franchise Directory?

If the brand meets the FTC definition of a franchise, SBA currently requires it to appear in the SBA Franchise Directory to obtain SBA financing.

Does being listed in the Directory mean SBA approves the franchise?

No. Directory placement is not an SBA endorsement or recommendation and does not guarantee business success or loan approval.

What if my franchise is not in the SBA Directory?

If the brand meets the FTC franchise definition, the franchisor generally needs to complete SBA’s brand-review process and obtain Directory placement before SBA financing can proceed.

How much down payment is required for a new franchise?

Under the currently effective 7(a) rules, a startup business generally requires an equity injection of at least 10% of total project costs. A lender may require a larger contribution depending on underwriting.

Is there a 165 SBSS requirement for SBA franchise loans?

No universal current SBA franchise rule requires a 165 SBSS score. SBA eliminated its use of the FICO SBSS score for 7(a) Small loans effective March 1, 2026. Lenders still evaluate creditworthiness.

What is the maximum SBA 7(a) loan for a franchise?

Most SBA 7(a) loans have a maximum loan amount of $5 million. The amount actually available depends on the project and underwriting.

Can SBA financing cover the franchise fee?

An eligible 7(a) project can potentially include the initial franchise fee and other approved startup or acquisition costs as part of the overall use-of-proceeds structure.

Do I need prior franchise or industry experience?

Not universally. The lender may evaluate direct experience, management history, transferable skills, franchisor training, and the overall operating plan.

How long does an SBA franchise loan take?

There is no universal closing timeline. Directory status, underwriting, documentation, equity verification, lease review, appraisals, and other closing requirements can affect timing.

What is Item 19 of the FDD?

Item 19 addresses financial performance representations. A franchisor is not required to make an earnings representation, but when it does, applicable financial performance claims generally must be properly supported and disclosed in Item 19.