How Much Are Business Loans for Franchises?

Starting a franchise can be an exciting and lucrative opportunity, but securing the necessary funding is often the biggest hurdle. Whether you're eyeing a fast-food giant like McDonald's or a fitness brand like Anytime Fitness, understanding the costs and financing options is crucial. In today’s economic climate—marked by inflation, rising interest rates, and shifting consumer behaviors—business loans for franchises have become a hot topic.

The Cost of Franchising: Breaking Down the Numbers

Before diving into loan specifics, it's essential to understand the total investment required for a franchise. Costs vary widely depending on the brand, industry, and location.

Initial Franchise Fees

Most franchises require an upfront fee just to use their brand name and business model. These fees can range from $10,000 to over $100,000 for well-established brands. For example:
- McDonald’s: $45,000 franchise fee (plus a total investment of $1M–$2.3M).
- Subway: $15,000 franchise fee (total investment: $150K–$350K).
- Anytime Fitness: $42,500 franchise fee (total investment: $381K–$784K).

Equipment, Build-Out, and Inventory

Beyond the franchise fee, you’ll need capital for:
- Real estate build-out or remodeling ($100K–$500K+).
- Equipment purchases (e.g., commercial ovens, gym machines, POS systems).
- Initial inventory (especially for retail or food franchises).

Working Capital

Many new franchisees underestimate the importance of working capital—the cash needed to cover payroll, rent, and other expenses until the business becomes profitable. Experts recommend having at least 6–12 months of operating expenses saved.

Types of Business Loans for Franchises

Now that we’ve covered costs, let’s explore financing options.

Traditional Bank Loans

Banks offer term loans with fixed or variable interest rates. These are ideal for franchisees with strong credit (680+ FICO) and collateral.
- Loan amounts: $50K–$5M+.
- Interest rates: 6%–12% (varies with market conditions).
- Terms: 5–25 years.

SBA Loans

The U.S. Small Business Administration (SBA) guarantees loans, reducing lender risk. Popular options include:
- SBA 7(a) Loans: Up to $5M, rates around 7%–10%.
- SBA 504 Loans: For real estate or equipment, fixed rates under 6%.

Franchisor Financing

Some franchisors offer in-house financing or partnerships with lenders. For example:
- Domino’s provides assistance for equipment and store build-outs.
- UPS Store partners with lenders for SBA-backed loans.

Alternative Lenders

Online lenders like Kabbage, OnDeck, or Fundbox provide faster approvals but at higher rates (15%–50% APR). These are best for short-term needs or borrowers with weaker credit.

Factors Affecting Loan Approval

Lenders evaluate several factors before approving a franchise loan:

Franchise Brand Strength

Established brands (e.g., Dunkin’, Ace Hardware) often receive better loan terms because lenders view them as lower risk.

Personal Credit Score

A FICO score of 680+ is typically required for traditional loans. Below 600? Alternative lenders may be your only option.

Business Plan & Financial Projections

Lenders want to see realistic revenue forecasts and a solid repayment strategy.

Down Payment

Most lenders require 10%–30% down. SBA loans may allow less (e.g., 10% down for 7(a) loans).

Current Trends Impacting Franchise Financing

Rising Interest Rates

The Federal Reserve’s rate hikes have made borrowing more expensive. In 2023, the average small business loan rate jumped to 9%–12%, up from 6%–8% in 2021.

Inflation & Supply Chain Costs

Higher prices for materials, labor, and inventory mean franchisees need larger loans to cover startup costs.

The Shift to Digital Lending

Fintech companies are streamlining loan applications, with some offering approvals in 24–48 hours.

Case Study: A Real-World Example

Let’s say you’re opening a Taco Bell franchise.
- Total investment: $1.2M–$2.6M.
- Franchise fee: $25K–$45K.
- Loan needed: $800K (after a 30% down payment).

Financing options:
1. SBA 7(a) Loan: $800K at 8% over 10 years = ~$9,700/month.
2. Bank Term Loan: $800K at 7% over 7 years = ~$12,000/month.
3. Alternative Lender: $800K at 18% APR over 5 years = ~$20,300/month.

The SBA loan is the most affordable, but approval takes 60–90 days. If you need fast cash, an alternative lender might be necessary—despite the higher cost.

Final Tips for Securing a Franchise Loan

1. Research franchisor support. Some brands have preferred lenders or financing programs.
2. Improve your credit score before applying. Pay down debts and correct errors on your report.
3. Prepare a detailed business plan. Highlight your industry experience and market demand.
4. Compare multiple lenders. Don’t settle for the first offer—negotiate terms.
5. Consider ROBS (Rollovers for Business Startups). If you have a 401(k), you can use those funds without a loan.

Franchising remains a proven path to entrepreneurship, but securing the right financing is half the battle. With the right preparation, you can turn your franchise dream into a thriving reality.