realize it is. Many aspiring franchisees apply for franchise startup financing every year, but their applications don’t make it through. 

Now, this doesn’t happen because their franchise plan isn’t viable or they don’t have good financial health; it’s often because they don’t understand how this financing works. Needless to say, if you start this process before some homework, it’ll delay your timeline and push your dream of opening a new franchise further. 

That’s why this blog explains the main things to understand about franchise startup funding before entering the water. Let’s break down the main things so you walk in prepared and make that deal work for you! 

Things to Know Before Applying for Franchise Startup Financing 

Franchise financing is a loan specifically used to cover the costs of purchasing and setting up a franchise. But there are some caveats in the process, which, if left out, can mean you cannot become a franchisee.

That said, if you don’t want this idea to fail, here are some things to understand: 

Your Net Worth and Liquidity are Evaluated Separately

Financiers thoroughly evaluate your liquid assets and net worth during the vetting process, and they do it separately. Your net worth includes your home equity, retirement accounts, and other assets. However, much of that is illiquid, and lenders care deeply about liquid assets. That’s why they also factor in your available cash, checking, savings, and marketable securities during the application process. Most franchise lenders want to see your financial liquidity equal to 10–20% of the total project cost, available separately from the loan itself. Put simply, if your wealth is tied up in property or a 401(k), you’ll be rich on paper but unbankable in practice. So, plan accordingly. 

The Franchise Fee Might Not Be Financeable

Another thing to understand before applying for this financing is that the upfront franchise fee, which is directly paid to the franchisor for your right to operate, is considered a soft cost. Since it holds no collateral value, most SBA (Small Business Administration) lenders and conventional lenders won’t finance it. 

In other words, if the business fails, the lender can’t recover a license, which is why they require you to have cash on hand for the franchise fee. Notably, these fees range from $30,000 to $100,000 or more and will be a significant out-of-pocket requirement.

SBA Loans Will Likely Work the Best, But They Have Rules

The SBA 7(a) loan is the dominant business financing vehicle for franchise startups in the US. New franchisees should look into these loans because of their longer repayment terms (up to 10 years for working capital, 25 years for real estate) and lower down payments. 

But while that convenience is a major plus, these SBA loans have certain eligibility standards. For instance, they want a franchise to be listed on the SBA Franchise Registry. They also require the borrower to inject at least 10% equity, and personal guarantees are required from anyone owning 20% or more. If you understand these fine-print details, it can save significant time and prevent last-minute disqualifications.

Personal Credit Score Has a Hard Threshold

A low personal credit score reflects badly on your reputation, especially during a loan approval process. Most SBA lenders won’t move forward below a 680 personal credit score, and the more competitive programs expect 700 or higher. So much so that a franchisee with a strong franchisor brand and industry experience can get declined if their score is below the threshold. 

It’s also worth mentioning that the score lenders pull is not always the same as what consumer apps show you. Lenders use FICO scores from all three bureaus and often take the middle score. Hence, knowing your actual lender-facing score before applying is non-negotiable. 

There Should Be a Plausible Path to Debt Repayment 

A lender’s core question is pretty standard: Can this business generate enough cash to repay the loan? For a startup franchise with no revenue history, lenders rely on the franchisor’s Item 19 (Financial Performance Representations in the Franchise Disclosure Documents). 

In case your franchisor doesn’t publish an Item 19 or has weak numbers, you have a harder case to make. For your application to go through, you must build a credible projection that shows monthly debt service covered by realistic revenue.

Working Capital is Crucial 

Many new franchisees only calculate the funds needed to open their doors. However, lenders want to see that you have enough runway to operate through the ramp-up period before the business becomes cash flow positive. That said, your working capital of 3-6 months of projected operating expenses must be built into your financing request. If your loan only covers construction and equipment and you run out of cash soon after, the business fails, and the lender loses. So understand that available operating capital shouldn’t be an afterthought. 

Collateral Shortfalls Could Happen; Plan for Them

Lenders might require collateral to secure the loan, especially if it’s not an SBA loan. For you, this collateral could be equipment, leasehold improvements, and sometimes a lien on personal real estate. If your total collateral doesn’t cover the loan amount, it’s called a collateral shortfall, and you’ll have to explain it to the lender. Franchisees who go in without understanding their collateral position get surprised during underwriting, so clearly know what you own and what it’s worth as collateral. 

Conclusion 

A franchise startup can be a huge success with the right financing and planning. If you’re calculative and careful about the nitty-gritty details, it’ll surely work in your favor. So, instead of delaying this major decision owing to a lack of funds, approach ROK Financial experts and safely move through this process. We got you! 

FAQs

Do lenders not consider you because of previous business failures? 

They do consider you, but they’ll thoroughly review your full financial history. Even though a past failure doesn’t automatically disqualify you, it surely requires a strong explanation and solid compensating factors.

Can I apply with a business partner if I don’t qualify alone? 

Yes, but your partner becomes a guarantor as well, and their credit and financial information is fully reviewed. 

Does the franchisor’s brand size affect my approval chances?

Of course. Lenders are more comfortable with established brands that have strong unit economics and a track record. On the other hand, lesser-known franchisors face more scrutiny.