Franchise Loan FAQs

What is the difference between bank financing and SBA financing?
A bank that lends directly to a franchisee or other small business takes upon itself 100% of the risk associated with giving a loan. Therefore, banks are conservative in such situations. With an SBA guaranty, however, a bank can be less stringent in its lending policies. An SBA guaranty provides a bank with the promise that a certain percentage of the loan will be repaid no matter what.

Why do franchisors participate in franchise financing?
Because the necessary capital to invest in a franchise is significant, and because franchisors need franchisees, franchisors often provide financial assistance. Through either direct or indirect financing, franchisors can make capital available for franchisees.
What is the difference between direct and indirect franchisor financing?

Direct financing is when a franchisor lends money directly to a franchisee. This kind of financing is rare, and generally limited to established franchisors and certain industries, such as hotels and restaurants, that require an especially large amount of capital.
Indirect financing, which is more common, is when a franchisor directs a franchisee to a third party, which then actually gives the loan. The lender usually receives a guaranty from the franchisor, which is sometimes secured by the franchisee’s contract.