Loan types
Franchise financing, and the line item that sinks most first units
A full project cost breakdown on a $250,000 franchise unit, what SBA actually requires from you, and why the working capital line is where new owners run out of money.
Franchise financing is easier to get than most startup financing and harder to size correctly. Lenders like franchises because there is a track record for the concept even when there is none for you. What they will not do is protect you from underfunding the one line item that has no invoice attached to it, which is working capital, and that is where most first units actually fail.
The dominant channel by a wide margin is the SBA 7(a) loan. Banks and non bank SBA lenders write franchise units every day, up to $5,000,000, over ten years for a business without real estate and up to twenty five years with it. Equipment financing, conventional loans, and the franchisor's own in house program fill the gaps around it.
A $250,000 unit, costed line by line
Every franchise disclosure document contains an Item 7 estimate of the initial investment. Treat it as a floor. Here is what a realistic $250,000 service or small footprint unit looks like when you total the actual invoices.
| Line item | Amount | How it usually gets funded |
|---|---|---|
| Initial franchise fee | $35,000 | Rolled into the SBA loan. Paid to the franchisor at signing and almost never refundable |
| Buildout and leasehold improvements | $95,000 | SBA loan. The line most likely to run over, because you do not control the landlord or the permit office |
| Equipment and fixtures | $60,000 | SBA loan, or financed separately on the equipment itself over 60 months |
| Opening inventory and supplies | $18,000 | SBA loan, sized off the franchisor's opening order list |
| Training, travel, grand opening | $12,000 | SBA loan. Real money that owners routinely leave out of the budget |
| Working capital reserve | $30,000 | SBA loan. The line that gets cut first and should never be cut |
| Total project cost | $250,000 | SBA 7(a) of $225,000 plus a $25,000 equity injection from you |
At 10.5 percent over ten years, a $225,000 SBA loan costs about $3,036 a month, or $36,432 a year. Underwriting wants that covered at roughly 1.25 times, so the unit has to produce about $45,500 of cash after your own compensation. At a 12 percent unit level margin, that means roughly $380,000 of annual revenue before this deal works on paper.
What SBA actually requires from you
The franchise brand does part of the work. It does not do your part.
- An equity injection of at least 10 percent of total project cost for a new business. On our $250,000 unit that is $25,000, documented and seasoned in your own account, not appearing the week before closing. Many lenders want more. See the injection rules.
- A personal guarantee from every owner of 20 percent or more, plus a lien on personal real estate where there is meaningful equity.
- Personal credit in the high 600s or better, plus a completed personal financial statement and personal tax returns.
- A signed franchise agreement and the current FDD. The lender reviews the agreement itself for control and affiliation issues rather than relying on any central list. See the franchise agreement.
- A lease whose term matches the loan. A ten year loan against a five year lease with no option to renew is a real problem, and it gets caught late if nobody raises it early.
- Projections built from the franchisor's own numbers where an Item 19 financial performance representation exists, and from comparable units where it does not.
That last point deserves attention. Only some franchisors publish an Item 19, and the ones that do often publish top quartile results rather than system averages. Ask the franchisor for the full distribution, then call six existing franchisees from the Item 20 contact list and ask them what year two actually looked like. That phone call is worth more than any projection spreadsheet you will build, and lenders respect a file that references it.
Look at the calendar in that figure and count the loan payments. Closing happens around week twelve and the doors open around week twenty six, so you are servicing $3,036 a month for roughly three months before a single customer walks in, and another two or three months while volume ramps. That is $15,000 to $18,000 of debt service funded out of the working capital line before the unit contributes anything. Nobody puts that number on a term sheet, and it is the single most useful arithmetic you can do before you sign.
Buying an existing unit instead of building one
Resales are usually cheaper to finance and much faster to underwrite, because there is real cash flow instead of a projection. The tradeoff is that you inherit whatever the previous owner did, including deferred maintenance, a tired store, and any relationship damage with the franchisor.
- What changes
- The file becomes a business acquisition loan, underwritten on the unit's historical cash flow rather than projections
- Injection
- Still at least 10 percent of project cost, and up to half of that can be a seller note on full standby for the life of the loan
- Franchisor approval
- Sits ahead of the lender. The transfer has to clear the franchisor first, and most agreements give them a right of first refusal
- Transfer fee
- Commonly $10,000 to $25,000, plus mandatory retraining and often a required remodel within a set period
- Remodel obligation
- Frequently triggered by a transfer. A $75,000 required refresh in year one belongs in the project cost, not in a surprise
- Agreement term
- You inherit the remaining term, not a fresh one, unless the franchisor grants a new agreement as part of the transfer
The remodel obligation is the item that catches buyers. If the franchise agreement requires a refresh on transfer or at a set image standard interval, that cost is due whether or not you financed it, and asking for it after closing means a second loan on worse terms. Find it in the agreement before you sign the letter of intent.
How the pieces get split
A single SBA loan covering the whole project is the simplest structure and usually the cheapest. It is not always available, and splitting has real advantages when it is not.
Financing the $60,000 of equipment separately at 11 percent over 60 months costs about $1,305 a month and $78,276 total, which is more expensive per dollar than the SBA money but leaves the SBA request smaller and easier to approve. It also matches the loan term to the useful life of the asset, which is what equipment financing is built to do. The reverse trade is that two closings mean two sets of fees and two lenders with a claim on the same business.
One thing not to do is fund a franchise buildout with short term working capital money. A daily payment advance against a unit that has not opened yet has no revenue to draw from, and the payment starts before the doors do. If the buildout runs over, the right conversation is with the SBA lender about a modification, not with a funder selling speed.
What Exp Capital does with this
Exp Capital Solutions is a broker. We do not fund franchise units, we do not approve SBA loans, and we do not set terms. What we do is help you build the project cost sheet honestly before it goes anywhere, including the working capital line everyone shrinks, and then place the file with the SBA lenders and equipment funders who actually know your concept. When your file is stronger as a straight SBA package that pays us nothing extra, that is what we tell you, and when the numbers say the unit does not carry the debt at all, we say that too.