How to Finance Your Franchise

As artificial intelligence begins to eat more and more management jobs, executives are looking to business ownership to secure their earning future. For many people, franchise ownership is the right path to becoming a business owner. Once they decide to purchase a franchise, prospective owners need to finance their venture.

Here are several ways prospective franchise owners can fund a franchise if they’re considering one:

Personal or family debt. This is a funding source many buyers have chosen: taking out a second mortgage, a home equity line of credit, using a life insurance policy or credit cards, or borrowing from friends and family. If a buyer has the credit rating and assets to make this work, they are betting on themselves, with no approval from strangers needed. They take all the risk and reap all the rewards after they’ve met their obligations to their investors.

But it also puts some of their future at risk. Franchises are a good fit for new business owners because they offer a proven track record and the support of a corporation with a proven model. They’re much less risky than starting a business from scratch, but not completely risk-free, of course.

Average success rates are important because 94 percent of U.S. startups fail within five years. Even a business that’s not a startup has a strong risk of failing: 20 percent fail during the first year, 50 percent by year five, and nearly 66 percent by year 10. Those aren’t great odds, no matter how smart and hardworking an owner might be.

Franchises have a 90 percent success rate overall because they’ve already proven that their business model is profitable and meets their customers' needs. Prospective owners are carefully screened and required to spend some time inside a franchise unit before being approved for a purchase.

Traditional bank loans and SBA loans. The 7(a) Loan Program, SBA’s primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses. Buyers can borrow up to $5 million to finance or expand a business, and they have a team of lenders on their side helping them find the right fit for their business plan.

Applicants must be an operating business to qualify and be creditworthy enough to convince a lender to provide the funds. That’s why personal assets, from savings or other sources, are an important factor in lending decisions.

Funding from a 401(k) or IRA. The ROBS (Rollover as a Business Start-Up) program has a proven track record of almost 30 years. The program has helped thousands of entrepreneurs receive funding in a way that is safe, effective, and legal, since it was designed in cooperation with the IRS. It’s also quick, as many business owners receive their funding in as little as 10 business days.

Some entrepreneurs worry that they’re putting their retirement at risk, but it’s a legitimate way to fund a new company without paying traditional interest and loan fees. To avoid early withdrawal penalties and preserve tax-deferred status, financial planners work with buyers to create a new retirement plan, taking into account their business plan. They move existing funds (or the portion they plan to use for the business) into this new retirement plan. Here’s a link to an article about this process and its advantages. With this program, buyers become their own bankers, which means they don’t start with debt from a traditional bank.

Using your bonus or buyout to finance your franchise. Some executives will use performance bonuses or early-retirement buyouts to buy a franchise. The funds can be used as a down payment on a traditional or SBA loan, reducing the monthly debt service the company will be responsible for. The funds may also help close the income gap while the owner grows the business to meet their financial goals.

New programs that finance service companies. The SBA has developed a new program aimed at helping start home-based service companies. SOHO (Small Office Home Office) loans are designed specifically for start-ups, franchises, small businesses, and existing businesses. They are perfect for home-based franchises of all types and service businesses. Lenders will approve up to $350,000 in startup financing with only 10 percent down and a 10-year repayment term. Traditionally, loan programs have required up to 25 percent down and required securing the loan with a personal asset, such as a home or property.

For credit-worthy applicants, this is a fast option (approval in as little as one day and closing within a couple of weeks) with relatively low costs. The only caveats are that an applicant must have a credit score of 720 or higher and meet post-closing liquidity requirements.

Tax reforms, lower inflation, and a strong service industry are indicators that may make 2026 the right year for people leaving their corporate careers to buy a franchise. Understanding financing options, including analysis of the risks and rewards of each, is one of the first steps to becoming a successful franchisee.

Marshall Reddy is the founder of What The Franchise.