Best Franchise Loans in December 2024

Franchisor financing

 Pros: Typically requires less paperwork and delivers funds faster.

 Cons: May not offer the best rates or may set restrictions on how to spend the funds.

Often, branded-businesses like popular restaurants, stores, gas stations, plumbing and cleaning services and other companies may offer their own financing to franchise applicants. Even if the parent companies don’t offer direct financing to franchisees, they often partner with specific lenders to grant loans to applicants.

If you have a specific franchise in mind, research the company’s website to see what loan options are available. At the same time, it’s worth contacting your local bank or an alternative lender to see if they can offer you a better deal.

SBA

 Pros: Offers a partial guarantee from the federal government and capped interest rates.

 Cons: You generally need good credit, a solid business plan and multiple years in business to qualify.

SBA 7(a) loans

As the most popular option in the SBA loan program, the SBA 7(a) loan provides up to $5 million to use for general franchise expenses like purchase fees, inventory, payroll, equipment, real estate and more. While the government guarantees a portion of the funds, you must apply directly with an SBA-approved lender.

Repayment terms go up to 10 years for general expenses, or up to 25 years for real estate purchases. Interest rates can be fixed and variable but are capped based on SBA standards. You may need to provide collateral for loans over $50,000.

SBA 504 loans

The SBA 504 loan also provides up to $5 million, although eligible energy-related projects may qualify for $5.5 million. Funds are typically used for fixed assets, such as purchasing commercial property, buildings or machinery. The lender typically provides around 50% of the loan, while a Certified Development Company (CDC) covers 40%, leaving you to contribute the remaining 10% (or 20% in some instances).

Repayment terms range from 10 to 25 years. The SBA sets interest rates, which are usually 3.00% of the total loan amount. Keep in mind that the 504 loan program requires you to create or retain a minimum of one job opportunity per every $90,000 the SBA guarantees.

Banks

 Pros: Low interest rates, flexible repayment terms and higher loan amounts.

 Cons: Strict eligibility criteria and revenue requirements can make it hard for startups or bad credit borrowers to qualify.

Bank business loans and credit unions business loans are other options worth considering for your franchise. Depending on your credit score and liquid funds, you may qualify for financing with your current bank.

While these loans often have low interest rates and favorable repayment terms, business loan requirements can be strict. You’ll likely need an excellent credit score and solid revenue to qualify. Be prepared to present a comprehensive business plan and pledge collateral, as well.

Online lenders

 Pros: Fast funding times and more lenient eligibility requirements.

 Cons: Usually charges higher interest rates with less flexible repayment terms.

Online lenders, also called alternative lenders, typically fund loans within one to three business days. In comparison, traditional bank and SBA lenders can take anywhere from two weeks to three months to process and fund your loan.

While eligibility criteria will vary by lender and loan type, alternative lenders typically have more lenient requirements when it comes to minimum credit scores, business history and collateral.

That said, you can expect higher business loan interest rates and shorter repayment terms when using an online lender.

ROBS

 Pros: Use your current retirement savings to purchase stock and fund your franchise expenses, all tax free.

 Cons: You risk losing a chunk of your retirement savings, especially if the business fails.

You can also fund your franchise using ROBS, Rollover as a Business Startup. This is a tax-free option where you roll over money from an existing retirement account to a new 401(k) plan attached to your C corporation. Your business entity must be set up as a C-corp to allow you to purchase private stock. (If your business entity isn’t already set up this way, you can incorporate in seven easy steps.)

As your stock equity grows, you can use the profits to purchase a franchise, cover ongoing business expenses or as a down payment for an SBA loan.

Hiring a third-party ROBS provider can help ensure you take all the right steps to avoid taxes or penalties. Once set up, you’ll need to file IRS Form 5500 annually, which outlines your plan’s assets.

You’ll also need to file corporate business taxes to avoid penalties from the IRS.

Lastly, make sure you follow your state’s specific laws regarding ROBS, which can be found on your state’s Secretary of State website.

When looking for a franchise loan, prioritize options with the lowest rates and fees — but also, be realistic about what you can qualify for. Loans with the best interest rates and lowest fees are the hardest to get, so carefully consider a lender’s requirements for time in business, credit score, net worth and access to liquid funds. Also factor in the approval and funding timeline, especially if you want to move fast.

• Time in business requirement: Some lenders expect you to have a minimum number of years in business, although some lenders work with startups.
• Rates and fees: Like with any loan, expect to pay upfront fees and ongoing interest rates. The best franchise loans will have low fees and interest rates, but are only available to the most qualified borrowers.
• Credit and financial requirements: Many lenders have minimum credit score requirements and often expect applicants to have a minimum net worth and/or amount of liquid funds.
• Approval timeline: Online lenders often offer the fastest approval and funding process, but you may get better rates and a higher loan amount if you go with the SBA or a traditional lender — just expect the process to take longer.