🏪 SBA 7(a) Loans Explained: How to Buy a Franchise, Fund a Buildout, and Lock in 25-Year Financing 📈

🚀 Using an SBA 7(a) Loan to Launch a Franchise: Down Payments, Spouse Income & Startup Rules 🔑

How to Use an SBA 7(a) Loan to Buy a Franchise and Build Out a New Location

For entrepreneurs looking to buy a franchise and build out a new location, SBA 7(a) financing remains one of the most powerful tools available. It offers long amortizations, competitive rates, and the ability to finance acquisition, construction, equipment, and working capital—all in one loan.

That said, startup SBA loans are more restrictive than loans for existing businesses. Approval is possible—but only if the deal is structured correctly.

Below is a practical breakdown of how SBA 7(a) loans work for franchise startups, what lenders really look for, and how borrowers can position themselves for approval.

What Is an SBA 7(a) Loan?

The SBA 7(a) loan program is the Small Business Administration’s flagship lending product. While loans are issued by banks and non-bank lenders, the SBA provides a partial guarantee—reducing lender risk and allowing for longer terms.

Key SBA 7(a) benefits for franchise buyers:

• Up to $5,000,000 loan amount

• 25-year amortization for real estate and buildout

• Ability to finance:

  • Franchise acquisition fees

  • Leasehold improvements / buildout

  • Equipment & FF&E

  • Working capital

• Fully amortizing (no balloon)

Can You Use an SBA 7(a) Loan for a Franchise Startup?

Yes—but with more scrutiny.

Startup franchise loans are evaluated differently than existing cash-flowing businesses. Lenders rely heavily on:

• Borrower strength

• Liquidity and equity injection

• Franchise brand performance

• Realistic financial projections

The SBA allows startup financing, but the margin for error is smaller.

Down Payment Requirements: Expect ~20% of Total Project Cost

For franchise startups, lenders typically require 20% equity injection.

This applies to the total project cost, which may include:

• Franchise fee

• Buildout / tenant improvements

• Equipment

• Soft costs

• Initial working capital

Equity can come from:

• Cash

• Retirement funds (ROBS, if structured properly)

• Seller carry (limited, must be subordinated)

The SBA wants borrowers fully invested in the success of the business.

The Role of Spouse Income & Global Cash Flow

One of the most misunderstood aspects of SBA underwriting is global cash flow analysis.

For startups:

• The lender evaluates household income and expenses

• Spouse income can be critical to approval

• Projections must show the business can support itself over time

If your spouse has stable W-2 income, it can:

• Offset early-stage business losses

• Support personal living expenses

• Strengthen overall debt coverage

This is especially important when the business will take time to ramp up.

Franchise Brand Matters More Than You Think

Not all franchises are treated equally.

Lenders prefer:

• SBA-approved franchises

• Brands with multiple operating locations

• Proven unit-level economics

• Transparent financial disclosures (FDDs)

A strong franchise brand can compensate for:

• Limited operating history

• First-time ownership

• Conservative startup projections

What Lenders Will Require

Expect to provide:

• Personal financial statement

• Resume showing relevant management experience

• Franchise Disclosure Document (FDD)

• Business plan with 2–3 year projections

• Lease terms or LOI

• Construction/buildout budget

Preparation is everything in SBA lending.

Why Structure Matters More Than Rates

Most SBA deals fail before submission—not because of credit, but because of structure.

Common mistakes include:

• Under-capitalized borrowers

• Unrealistic projections

• Incomplete budgets

• Poor lease terms

At Medallion Funds, we focus on front-end structuring so the loan makes sense to the lender before it ever hits underwriting.

Final Thoughts

SBA 7(a) loans remain one of the best ways to:

• Buy a franchise

• Build out a new location

• Lock in long-term, fully amortizing financing

Yes, startup loans are more restrictive—but with the right equity, income support, and structure, approval is absolutely achievable.

If you’re considering a franchise acquisition or startup buildout, the key is working with an advisor who understands how SBA lenders actually think.

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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory