Thinking about buying a franchise? You’re not alone. Franchising continues to grow, and there are now more than 1,000 brands to choose from. Becoming a franchise owner is a common way to get into business ownership.
Some franchises have low startup costs and can be started for as little as $5,000. But if you’re aiming to join a well-known national brand like McDonald’s, the cost is much higher — often between $500,000 and $1 million. Buying a franchise can be one of the biggest investments you’ll make, second only to buying a home.
So, how do people find the money to cover these costs?
There are several ways to get the funding you need to buy a franchise. Below are seven common options, listed from the safest to the riskiest.
1. SBA-Backed Loan
One of the most common ways to fund a business is through a Small Business Administration (SBA) loan. This method has worked for many business owners. The SBA is often familiar with the franchise you want to join and looks at both the business and your financial history. It works with several banks and helps match you with the best loan options. Lenders like SBA loans because the SBA guarantees part of the loan, which lowers their risk if you can’t repay.
2. Find Partners or Investors
It’s not true that all entrepreneurs go solo. Many business owners team up with partners, especially when others bring useful experience. Having a partner reduces your personal risk. You can also look for investors who want to put money into a proven business model, like a franchise, without taking an active role. The upside of this method is lower financial risk for you. The downside is that you’ll have to share any future profits.
3. Equipment Loan
If your franchise needs expensive equipment — like large brewing tanks, ovens, or delivery trucks — you might consider an equipment loan. There are lenders who specialize in this type of loan. Since the loan is backed by the equipment itself, it’s often easier to get approved. But if you can’t make the payments, the equipment can be taken back by the lender, and your business could suffer as a result.
4. Franchisor Financing
Some franchises work with lenders to help new owners get started. When a franchise company has a strong relationship with a lender, the process is usually quicker and the terms can be better. This is often one of the easiest ways to get funding if it’s available.
5. Personal Loan
If other options don’t work, you could try getting a personal loan from a bank — but this is only realistic if you have good credit. This option carries more risk. If you fail to make payments, your credit score could drop, and it may be harder to borrow money in the future.
6. 401(k) Rollover
A growing number of franchise buyers use money from their 401(k) retirement plan to start their business. If you’ve been working in a corporate job and have retirement savings, this method — called ROBS (Rollovers as Business Startups) by the IRS — lets you move that money into your new franchise’s retirement plan. Then, you can use those funds to help launch your business.
There are many companies that help with this type of setup. But be cautious. The IRS has raised concerns about this strategy and has looked into whether it’s allowed. You should talk to a financial expert before trying this, since it could lead to legal or tax problems later on.
7. Use a HELOC
If you own a home and have built up equity, you might take out a Home Equity Line of Credit (HELOC) to help pay for your franchise. This option usually comes with good interest rates and flexible repayment plans. However, there’s a big risk: If you can’t repay the loan, you could lose your home.
Why Not Just Pay Cash?
With so many ways to fund a franchise, you might ask, “If I already have the money, why not just pay cash?”
It might seem simple, but paying cash means tying up all your money in one place. A new franchise often takes a year or two to become profitable. Meanwhile, your cash could be earning returns elsewhere.
By using loans, partners, or investors, you spread out your risk and keep some of your money available for other uses. This gives you more flexibility and protects more of your overall finances.
As you can see, there are many ways to get the money you need to buy a franchise. Take time to look at each option and pick the one that works best for your personal and financial situation.
