Yes, you can use an SBA loan to buy or open a franchise, as long as the franchise brand is eligible and you qualify as a borrower. The SBA does not lend the money itself. It guarantees a portion of a loan made by a participating lender, which makes lenders more willing to finance a franchise purchase. Two tests apply: the brand must be eligible, and you must show you can repay. This guide covers the programs, the franchise directory, the costs, the personal guarantee rule and the steps to apply.
TL;DR
- A franchise brand that meets the FTC definition of a franchise must be listed in the SBA Franchise Directory before its franchisees can get an SBA-backed loan.
- The 7(a) program is the usual route. It goes up to $5 million and can pay for equipment, working capital, real estate and a change of ownership.
- Anyone holding 20% or more of the business generally has to personally guarantee the loan.
- Being listed in the directory makes the brand eligible. It does not approve you, so your credit, cash flow and plan still decide the outcome.
- If SBA timelines or requirements do not fit your situation, other financing can cover equipment, cash flow and build-out costs.
Table of Contents
- How SBA loans work for franchise owners
- The SBA Franchise Directory: check this first
- Which SBA programs franchisees use
- What an SBA loan can pay for
- Rates, fees, equity and repayment
- The 20% rule and personal guarantees
- How to apply, step by step
- Our perspective: SBA is one tool, not the only one
- When an SBA loan is not the right fit
- Financing a franchise with Capital for Business
- FAQ
- Sources
How SBA loans work for franchise owners
An SBA loan is a regular loan from a bank or other approved lender, with a government guarantee on part of it. If the borrower defaults, the guarantee reduces the lender's loss. That is why the loans can have longer terms and lower equity requirements than many conventional loans.
For 7(a) assistance, SBA says a business must be operating, for-profit, located in the U.S., small under SBA size standards, not in an ineligible category, creditworthy, and able to show a reasonable ability to repay. It must also be unable to get the credit it wants on reasonable terms from non-government sources. A franchise is treated like any other small business under those rules, with one extra layer: the brand itself has to clear SBA's franchise review.
Because SBA does not lend directly to franchise borrowers under 7(a), you apply through a participating lender. SBA points applicants to its Lender Match tool, and the lender decides which documents it needs and which SBA-backed product fits.
The SBA Franchise Directory: check this first
Before you pay a franchise fee or sign a lease, find out whether the brand is on the directory. SBA describes the directory as a list of brands eligible for SBA financial assistance, updated weekly. Lenders and certified development companies use it to evaluate franchise eligibility.
The rule that matters is this: under SBA's SOP 50 10 8 technical updates effective June 1, 2025, a brand that meets the FTC definition of a franchise must be on the directory for its franchisees to qualify for SBA-backed loans. SBA also notes that a listing is not an endorsement and does not guarantee the franchise will succeed.
What a listing changes for your lender
Law firm commentary on the reinstated directory explains the practical effect. When a brand is listed, lenders can proceed without reviewing the franchise agreement for affiliation or eligibility problems, unless specific management arrangements suggest third-party control. If a brand is not listed, the lender must review the documents by hand to decide whether the relationship is ineligible. Another firm adds that the older requirement for a negotiated SBA addendum was replaced with a one-time signed franchisor certification.
For you, that means less paperwork between the lender and a decision, and fewer surprises late in the process. If your brand is missing, ask the franchisor whether it is working on a listing before you spend money on legal or application costs.
What a listing does not change
The directory only speaks to the brand's eligibility. You still have to qualify. Lenders look at your personal credit, your industry experience, your available cash, the franchise's disclosure document and your projections. A listed brand with a thin application will still be declined.
Which SBA programs franchisees use
Three SBA programs come up most often. They differ in size, purpose and speed.
| Program | Amount | Terms | Best for |
|---|---|---|---|
| 7(a) | Up to $5 million | Up to 10 years for general purposes, up to 25 years for real estate | Franchise fee, equipment, working capital, buying an existing unit |
| 504 | $25,000 to $5.5 million | 10 years for equipment, 25 years for real estate | Buying real estate or major equipment |
| Microloan | Up to $50,000 | Up to six years | Small startup needs: inventory, equipment, working capital |
Most franchisees start with 7(a) because one loan can cover many costs at once. The 504 program is built for fixed assets, such as a building or heavy equipment, and is paired with a certified development company. Microloans suit a small-footprint franchise, such as a home-based service brand, where the total need stays under $50,000.
If you are weighing 7(a) against 504, our comparison of SBA 504 vs 7(a) walks through when each one fits. For smaller needs, the microloan guide explains how that program works.
What an SBA loan can pay for
SBA lists the permitted uses of a 7(a) loan: real estate and building purchase or improvement, short- and long-term working capital, equipment, furniture, fixtures, supplies, refinancing current business debt, and full or partial change of ownership. For a franchisee, that translates into practical costs:
- Franchise fee and initial training costs that are part of the startup budget.
- Build-out and leasehold improvements for a restaurant, retail unit, fitness studio or service center.
- Equipment and fixtures, from kitchen lines to HVAC trucks to point-of-sale systems.
- Opening inventory and supplies.
- Working capital to cover payroll and rent until the unit turns a profit.
- Buying an existing franchise unit from a current owner, including a partial buyout of a partner.
- Refinancing existing business debt, in some cases.
Working capital is the line item new owners most often underestimate. A unit can be fully built and stocked and still run short in month three. When you build the budget, add a cash reserve for the ramp-up period rather than financing only the visible costs.
Rates, fees, equity and repayment
SBA loans have more published rules than most business loans, so you can estimate the costs before you apply.
Interest rates. 7(a) rates are negotiated between you and the lender, subject to SBA maximums. Rates generally move with market benchmarks, so check current numbers when you apply. Our SBA interest rate breakdown explains how the maximums are built.
Fees. Lenders may pass the upfront guarantee fee on to the borrower, but not the annual service fee, according to the same SBA page. Ask for the guarantee fee in dollars on your specific loan amount, since it depends on the size and term.
Equity. A typical 504 project calls for at least 10% borrower equity, per SBA. For 7(a), lenders set their own expectations, and a new franchise with no operating history will usually face closer scrutiny of how much of your own cash is going in.
Repayment terms. 7(a) terms can extend to 25 years, in practice for real estate, and up to 10 years for general purposes. A longer term lowers the monthly payment, which helps a unit still ramping up.
Prepayment. Prepayment penalties apply to 7(a) loans with maturities of 15 years or more, if you prepay 25% or more of the outstanding balance within the first three years, according to SBA. That matters if you plan to refinance or pay off the loan early after a strong first year.
Working Capital Pilot. For 7(a) Working Capital Pilot loans, SBA lists a maximum guarantee of 85% for loans of $150,000 or less and 75% above that, with a maximum maturity of 60 months. It is a narrower product than a full franchise loan.
A simple budgeting example
Say your total project cost is $400,000: $50,000 for the franchise fee, $200,000 for build-out, $90,000 for equipment and inventory, and $60,000 for working capital. At 10% equity, you would contribute $40,000 and finance $360,000. Each lender sets its own equity requirement, so the real number may differ. Ask about it before you fall in love with a site.
The 20% rule and personal guarantees
"The 20% rule" usually refers to the personal guarantee. Under 13 CFR 120.160, holders of at least 20% ownership generally must personally guarantee an SBA business loan. The same regulation lets SBA or a delegated lender require guarantees from other people or entities regardless of ownership percentage when it considers that necessary for credit or other reasons.
Three points follow for franchisees:
- A personal guarantee means personal liability. If the unit fails, the lender can pursue guarantors. Talk to an attorney about how your personal assets are exposed before you sign.
- Bringing in partners does not remove the guarantee. Each person owning 20% or more signs. A lender can also ask a spouse or a minority investor to sign if it sees a credit reason.
- It is not specific to franchises. The rule applies to SBA business loans generally, so you will meet it whichever program you choose.
How to apply, step by step
- Confirm the brand is on the directory. Search the SBA Franchise Directory by brand name and check the listing before you commit funds.
- Read the franchise disclosure document. SBA recommends professional legal and accounting review of the franchise agreement, lease, financial statements, tax returns, sales agreement and total acquisition and operating costs. A franchise attorney and a CPA earn their fees here.
- Prepare your plan. SBA recommends a business plan, an expense sheet and five-year financial projections for a franchise financing request. Use the franchisor's unit economics as a starting point, and then test them against your local rent, wages and competition.
- Gather personal documents. Expect to provide tax returns, a personal financial statement, proof of your cash injection and details on your experience. Your lender will tell you exactly which documents it needs.
- Find a lender. Use SBA's Lender Match tool or approach lenders that have financed your franchise brand before. Familiarity with the brand tends to speed up reviews.
- Submit, answer questions, close. Underwriting often involves follow-up requests. Respond quickly and keep your documents consistent across the application.
A rule update is worth knowing about. SBA's Standard Operating Procedure moved from version 8.0 to SOP 50 10 8.1, effective October 1, 2026. Lenders now work under the newer version, so ask yours how the update affects your file.
Our perspective: SBA is one tool, not the only one
We work with owners in hundreds of industries, including restaurants, retail, HVAC, plumbing and contracting, and we see the same pattern with franchise buyers. SBA financing is often the best long-term structure for a franchise purchase, because the terms are long and the payments stay manageable while a new unit finds its footing. We do not think it is the right answer for every franchisee at every stage.
The tradeoff is time and documentation. SBA financing involves a full underwriting file, and the directory check and guarantee requirements add steps. When an owner needs to move on a lease, replace broken equipment, or cover a payroll gap while waiting for an SBA closing, a faster product can bridge the period. And when an owner has been told no by a bank, an SBA path may still be open, but it deserves a candid look at credit and cash flow first.
Our advice is to build the whole capital stack on purpose: SBA for the core purchase if you qualify, and shorter-term financing for specific, quickly repaid needs such as equipment or seasonal inventory. Do not take on a financing product whose payment your unit cannot carry in its slowest month. If you are still comparing options, our guide to business loans for startups shows how different products fit different stages.
— Capital
When an SBA loan is not the right fit
Some situations point away from SBA financing, at least for part of the project:
- The brand is not on the directory. A lender will need to review the franchise documents manually, or may decline. Check whether the franchisor plans to apply for a listing.
- You need funds on a short timeline. SBA underwriting takes longer than most alternative products.
- Your credit profile is below what SBA lenders accept. Improving your credit and building a larger cash injection can come first.
- You need a small, specific amount. Equipment for a single location, a line of credit for payroll swings, or a short-term working capital loan may fit better than a large SBA package.
For those cases, structures like equipment financing, a business line of credit or working capital funding can cover the gap, often alongside an SBA loan rather than in place of it.
Financing a franchise with Capital for Business
Capital for Business has served small business owners since 2009. For owners who are ready to pursue government-backed financing, we offer SBA loans, listed from 6%. For needs outside an SBA package, our funding solutions include equipment financing from 0.8% per month, business lines of credit from 1.2% per month and working capital loans from 1.5% per month. Business term loans start from 7%, and our term loan page has the details. We can help you compare these options against your timeline and credit profile.
FAQ
Can I get an SBA loan for a franchise?
Yes, if the franchise brand is eligible and you qualify as a borrower. Brands that meet the FTC definition of a franchise must be listed in the SBA Franchise Directory. You apply through a participating lender, which decides whether your credit, experience and cash flow support the loan.
What is the 20% rule for SBA loans?
It refers to personal guarantees. Anyone owning 20% or more of the business generally must personally guarantee the loan, under 13 CFR 120.160. SBA or the lender can also ask for guarantees from other people when it sees a credit reason, whatever their ownership share.
Can I get a $100,000 SBA loan for a franchise?
Yes, the 7(a) program runs up to $5 million, and the microloan program goes up to $50,000, so $100,000 falls within 7(a). Lenders set their own minimums and requirements. Your lender will tell you whether a loan of that size makes sense for your project.
Does being on the SBA Franchise Directory guarantee approval?
No. A listing means the brand is eligible for SBA financing and can speed up the lender's review. SBA says the listing is not an endorsement. You must still show repayment ability and satisfy the lender's credit standards.
Can I use an SBA loan to buy an existing franchise unit?
Yes. SBA lists complete or partial change of ownership as an eligible use of a 7(a) loan. The brand must still be eligible, and the lender will review the unit's financials and the transfer terms with the franchisor.
Sources
- 7(a) loans, U.S. Small Business Administration
- Access affordable 7(a), 504 and microloans, U.S. Small Business Administration
- SBA Franchise Directory, U.S. Small Business Administration
- SBA lender resources: partnering with SBA loan programs
- SBA lenders: 7(a) terms, conditions and eligibility
- SOP 50 10 8 technical updates effective June 1, 2025
- SBA Information Notice: issuance of SOP 50 10 8.1
- 13 CFR 120.160, loan conditions (eCFR)
- SBA reinstates Franchise Directory, McDonald Hopkins
- SBA reinstitutes Franchise Directory, Saxton & Stump