Add up the real cost of the franchise
The real cost is the franchise fee plus build-out, equipment, opening inventory, training travel, and working capital. Item 7 of the franchise disclosure document lists an estimated range for each.
Franchisors are required to give you a franchise disclosure document, or FDD, before you sign. Item 7 shows the estimated initial investment as a low and a high number. Plan around the high number, because costs rarely land at the low end.
- Initial franchise fee
- Real estate, lease deposits and build-out
- Equipment, signs and technology
- Opening inventory and supplies
- Grand opening marketing
- Working capital for the first months
Read our overview of average franchise fees for background, and ask a franchise attorney to review the FDD before you sign anything.
Also ask about ongoing costs that do not appear in the startup number: royalties, advertising fund contributions, required technology fees and renewal or transfer fees. These come out of revenue every month and change how big a payment the unit can carry.
Decide how much you will put in yourself
Most lenders want to see meaningful owner cash in the deal, often a double-digit percentage of the total. Cash you put in yourself shows commitment and lowers the amount you must borrow.
Good sources of down payment include savings, proceeds from selling an asset, and money from a partner. Whatever you use, keep records of where it came from. Lenders and franchisors both ask.
Be careful about borrowing the down payment on a personal credit card. That adds payments before the unit earns anything, and it raises your personal debt just as you apply for business funding.
A useful habit is to write a one-page sources and uses table. Sources list your cash, any partner money and the loan. Uses list every cost from the FDD estimate. The two sides must match, and any gap becomes the amount you still need to raise.
Match the financing type to the cost
Use long-term, lower-cost financing such as an SBA loan for the big, slow-payback costs, and shorter funding for equipment and working capital. Pairing types keeps payments lined up with how the unit earns.
| Option | Best for | Trade-off |
|---|---|---|
| SBA loan | Franchise fee, build-out, long-term needs | Lower cost but slower and more paperwork |
| Term loan | Defined one-time costs | Fixed payments start right away |
| Equipment financing | Ovens, vehicles, machines, fixtures | The equipment is the collateral |
| Line of credit | Slow ramp-up and payroll timing | Variable balance, needs discipline |
ROI Funder places SBA loans, term loans and equipment financing. Our team does not place acquisition loans or startup loans for businesses under 6 months, so a brand-new unit with no operating history may need a different route, such as a bank or SBA lender directly.
Check whether the franchise is SBA-eligible
Franchisors can be listed in the SBA's franchise directory, which can speed up SBA review. Ask your franchisor whether the brand is listed, and check the SBA's site for current details.
SBA-backed loans are a common path for first-time franchise owners because of their long terms. Eligibility depends on the franchise agreement and on whether the brand has been reviewed. Rules and limits change, so confirm current requirements with the SBA or an SBA lender. Our posts on SBA 7(a) loans and the SBA application process cover the basics.
Even when a brand is listed, the lender still reviews your credit, your experience, your cash in the deal and the projected cash flow. Treat the listing as a head start, not an approval.
Prove the unit can carry the payment
Divide the monthly payment by the sales the unit needs to cover it. If that sales level is far above what comparable units achieve, the plan is too tight.
Franchisors may provide earnings claims in Item 19 of the FDD, but not all do. When they do, treat the numbers as a ceiling to test, and call current owners to ask what their first year really looked like.
Example: you borrow $250,000 and the payment is $5,000 a month. If the unit keeps 10 cents of every sales dollar after all costs except the loan payment, it needs $50,000 in monthly sales just to cover that payment. If comparable units sell $40,000, the plan does not work. Run this check before signing, using the steps in our revenue-to-payment guide.
Keep a reserve for the first months
Plan for the unit to lose money or break even early on. A reserve that covers payroll, rent and loan payments for several months protects you while sales build.
Many new franchise owners fund the build-out and then run out of cash in month three. Add working capital to your request from the start. ROI Funder looks at 500+ FICO, 6+ months in business and $20,000+ in monthly revenue, so an existing owner adding a unit may qualify on current revenue. Applying is a soft pull with no obligation.
Ask the franchisor for a list of current owners in your region and call several. Good questions: how long until the unit broke even, how much working capital you wish you had started with, and which costs surprised you. Their answers will do more for your plan than any brochure.
Frequently asked questions
Can I finance 100% of a franchise?
It is uncommon. Most funders and franchisors expect owner cash in the deal, so plan for a down payment.
Do I need good credit to buy a franchise?
Higher scores open more options and better pricing. Score requirements vary by funder and loan type, so ask early.
Is the franchise fee tax deductible?
Parts of franchise costs may be deductible or amortized over time. Ask your accountant how to treat each item.
What if I already own a business and want to add a franchise unit?
Existing revenue and bank statements can help. Funders look at the history of your current business.