How to Finance a Franchise: SBA Loans, ROBS, and Other Funding Options

One of the most common questions prospective franchise investors ask is: how do people actually pay for this? Franchise investments range from $150,000 to over $1 million depending on the brand and industry, and most investors are not writing a check for the full amount out of pocket. Understanding your financing options before you start evaluating franchises will give you a clearer picture of what is actually within reach and what is not.

SBA 7(a) Loans: The Most Common Path

The Small Business Administration's 7(a) loan program is the most widely used financing vehicle for franchise acquisitions. These are loans made by commercial banks and credit unions, partially guaranteed by the SBA, which reduces the lender's risk and allows them to extend credit to business buyers who would not qualify for conventional commercial loans.

Typical SBA 7(a) loan terms for franchise acquisitions: loan amounts up to $5 million, 10-year repayment terms for business acquisition (longer for real estate), interest rates generally between prime plus 2.25% and prime plus 4.75%, and a down payment of 10 to 30 percent depending on the deal structure. The SBA has a pre-approved franchisors list called the SBA Franchise Directory — franchises on this list move through the loan approval process significantly faster than those that are not.

For semi-absentee investors, SBA loans work well because they allow you to preserve capital while financing a significant portion of the investment. The trade-off is personal guarantee requirements — you will be personally responsible for the debt — and a detailed underwriting process that reviews your personal financials, business plan, and the franchise's performance history.

ROBS: Using Retirement Funds Without Penalty

Rollover for Business Startups (ROBS) is a legal structure that allows you to use funds from a 401(k), IRA, or other qualified retirement account to invest in a franchise — without triggering early withdrawal penalties or income taxes. The structure involves creating a C-corporation that sponsors a new retirement plan, rolling your existing retirement funds into that plan, and using the plan to purchase stock in your corporation, which then funds the franchise.

ROBS is not a loan — there is no debt and no interest payments. This makes it attractive for investors who have substantial retirement savings and want to avoid carrying debt into a new business. The structure is legal but complex, and it requires ongoing compliance administration. The IRS has scrutinized ROBS arrangements, so working with a qualified ROBS provider is essential. Expect setup fees of $4,000 to $5,000 and annual maintenance fees of $1,500 to $2,000.

Portfolio Loans and Margin Lines

Investors with substantial brokerage accounts can sometimes use securities-backed lending or margin lines to access capital for a franchise investment without liquidating their portfolio. These facilities allow you to borrow against the value of your investment portfolio — typically up to 50 to 70 percent of eligible securities — at relatively low interest rates.

The advantage is speed and flexibility. The risk is that a market downturn could trigger a margin call, requiring you to repay the loan or add collateral at an inconvenient time. For investors with diversified portfolios and low borrowing ratios, securities-backed lending can be a cost-effective way to access capital without disrupting long-term investment positions.

Home Equity

Home equity lines of credit (HELOCs) and cash-out refinances are sometimes used to fund franchise investments, particularly for investors who have significant equity in their primary residence. Interest rates are generally lower than SBA loans, and the approval process is simpler. The obvious risk is that your home is collateral — a business that underperforms could put your residence at risk. Most financial advisors recommend against using primary residence equity as the sole source of franchise funding.

Cash

Some investors simply write the check. This is the cleanest path — no debt, no interest, no personal guarantees — but it concentrates a significant amount of capital in a single illiquid asset. For investors with substantial liquid net worth, an all-cash approach makes sense. For investors who would be deploying most of their liquid assets, some form of financing to preserve cash reserves is usually the smarter move.

How Much Do You Actually Need to Have?

Even with financing, most franchisors and lenders require that you have a minimum liquidity level — unencumbered cash that is not coming from a loan. This is typically $50,000 to $150,000 for most franchise concepts, though premium brands and multi-unit deals require more. Your total net worth (including home equity, retirement accounts, and investable assets) also factors into lender qualification. A franchise investment is not zero-down — you need real capital to enter.

If you are trying to understand what franchise investment level makes sense given your financial situation, schedule a discovery call with Built to Run. We can help you think through the capital structure before you commit to a specific concept.