The Pros and Cons of SBA Franchise Loans in 2025

Securing financing is a critical step for aspiring franchise owners, and Small Business Administration (SBA) loans often come to mind as an attractive option. In 2025, SBA franchise loans continue to help entrepreneurs fund new franchises with favorable terms backed by government guarantees. But like any financing route, SBA loans have their advantages and drawbacks. In this post, we’ll explore the pros and cons of SBA franchise loans in 2025, so you can decide if this path aligns with your business goals.

What Are SBA Franchise Loans?

SBA franchise loans refer to small business loans that are partially guaranteed by the U.S. Small Business Administration and used to finance franchise businesses. The most common program is the SBA 7(a) loan, which can provide up to $5 million in funding for a wide range of business purposes – from initial franchise fees and build-out costs to equipment and working capital. The SBA doesn’t lend directly; instead, it works with approved lenders (banks, credit unions, and specialized franchise lenders) to reduce their risk by guaranteeing a portion of the loan. This guaranty encourages lenders to extend credit to new franchisees who might not qualify for conventional bank loans.

Key features of SBA franchise loans in 2025 include:

• Loan Amounts: Financing up to $5 million (depending on the program), which can cover a substantial franchise investment including multi-unit developments.
• Long Repayment Terms: Terms can extend 7 to 10 years for working capital or up to 25 years for real estate, keeping monthly payments lower.
• Competitive Interest Rates: Rates are capped by the SBA. They are typically tied to the Prime rate plus an allowable spread. Even though Prime rates in early 2025 have been relatively high, SBA loan rates are often reasonable for borrowers with solid credit.
• Down Payments: Typically around 10% – 20% equity injection is required. Many franchise loans will ask the borrower to put in some of their own cash (skin in the game).
• SBA Guarantee Fees: The SBA normally charges a guaranty fee (a percentage of the loan guaranteed) and annual service fees, but for the second year in a row, SBA has waived upfront guarantee fees on loans $1,000,000 or less for both 7(a) and 504 loans . This fee relief, available through fiscal year 2025, can save franchisees thousands of dollars on smaller loans.

With those basics in mind, let’s break down the benefits and drawbacks of using an SBA loan for your franchise.

Pros of SBA Franchise Loans

1. Lower Interest Rates and Long Terms: SBA loans generally offer lower interest rates than many alternative financing options (such as online small business loans or credit cards) and come with longer repayment terms. This combination results in more affordable monthly payments for franchisees. The government guaranty allows lenders to offer rates that are competitive and often capped at reasonable levels. For example, SBA 7(a) loan rates might be Prime + a spread, which in 2025 could land in the high single digits – manageable compared to some non-SBA loans that can exceed 10-15%. Moreover, terms up to 10 years (or 25 for real estate) mean you can spread out the cost and preserve cash flow in the critical early years of running your franchise.
2. Higher Loan Amounts with Small Down Payments: Because of the SBA backing, lenders are willing to lend a larger percentage of the project cost. You can finance major expenses – franchise fees, construction, equipment, opening inventory – all in one loan. Many SBA lenders require around a 15% down payment (equity injection) for a franchise startup, which is lower than what some conventional banks might require. For instance, on a $500,000 franchise investment, an SBA loan might cover $425,000 with $75,000 (15%) down from you. Some programs even allow as low as 10% down for strong candidates. This leverage helps you get started with less capital out-of-pocket, while still funding the full cost of your franchise launch.
3. Accessible to New Franchisees: One of the biggest pros is that SBA loans are designed to assist borrowers who might not qualify for standard bank loans . If you’re a first-time franchisee without a lengthy business track record, you may still be eligible for an SBA loan if you have good personal credit and a solid business plan. The SBA guaranty reduces the risk for the lender, so they can be more flexible with approving newer entrepreneurs or those without collateral. In fact, the SBA specifically aims to encourage small business growth – including franchised businesses – that otherwise couldn’t get financing. As long as you (and the franchise brand) meet the SBA’s eligibility criteria, your chance of approval can be higher than a comparable non-SBA loan.
4. Capped Fees and Support Programs: As noted, the SBA has waived certain fees for smaller loans through 2025, which directly saves you money. Even for larger loans, the fees are rolled into the loan and capped by regulation. Additionally, SBA loans come with the benefit of SBA resource partners. Borrowers can access free mentoring, training, and counseling through SBA Small Business Development Centers or SCORE. This support can help new franchisees in business planning and financial management – effectively setting you up for success post-funding.
5. Favorable Repayment and No Early Penalty (in many cases): SBA 7(a) loans do not have prepayment penalties as long as the loan term is under 15 years (and even for longer loans, penalties usually apply only in the first 3 years). This means if your franchise starts generating strong cash flow, you can choose to pay off your SBA loan early without an extra cost. The ability to prepay without penalty, combined with long terms, gives you flexibility to manage debt. Furthermore, SBA loans often have a period of interest-only payments during the initial months while you get the business started, easing the pressure until the franchise opens and revenue flows.

Cons of SBA Franchise Loans

While SBA loans offer many benefits, it’s important to recognize potential downsides and challenges in using them:

1. Lengthy and Paper-Intensive Process: The term “SBA loan” is sometimes synonymous with a lot of paperwork. These loans require a comprehensive application package including detailed financial statements, a thorough business plan, franchise disclosure documents, and personal financial information. The review process can be slow – often several weeks to a few months from application to funding. Franchisees have to be prepared for a rigorous process: multiple forms, documentation of income, and perhaps some back-and-forth to clarify your plan. If you need financing in a hurry, an SBA loan might not be the fastest option. Borrowers often joke about the “alphabet soup” of forms, but patience and diligence are required to get through the approvals.
2. Stringent Qualification Criteria: Despite being more accessible than conventional loans, SBA loans still have strict qualifications. You typically need a good personal credit score (usually in the high 600s or 700+ is desired) , no recent bankruptcies or major delinquencies, and adequate income to support the loan payments. Lenders will analyze your background and may require that you or your management team have relevant business experience (or that the franchisor provides strong training). They also expect a well-prepared business plan with realistic financial projections. Essentially, you must convince both the lender and the SBA that you can successfully run the franchise and repay the loan. If your credit is weak or you can’t demonstrate capability to operate the business, approval is not likely.
3. Personal Guarantee and Possible Collateral Requirements: An SBA loan is not “free money” or a grant – you will be signing a personal guarantee for the debt. This means if the franchise fails and can’t repay the loan, you are personally responsible to pay it back, and the lender/SBA can pursue your personal assets if necessary. For loans above certain amounts, lenders may also require collateral. The SBA 7(a) program itself doesn’t require collateral for loans under $25,000, and it won’t decline a loan for lack of collateral if other aspects are strong. However, lenders often take any available collateral for larger loans, such as a lien on your home or other properties, or on the franchise’s assets. For example, if you own a home with equity, the lender might place a second mortgage on it for a $1 million franchise loan. This adds risk for the borrower – you could potentially lose personal assets if you default. In 2025, one positive change is that some SBA lenders no longer require real estate collateral for loans up to $500,000 , focusing instead on the business assets. Nonetheless, be prepared for pledging collateral if your loan is sizeable.
4. Use of Funds Restrictions: SBA loans are somewhat inflexible in usage. They can cover a wide array of franchise startup costs, but they come with rules. For instance, SBA loans can’t be used for passive investments or unapproved purposes – you must use the funds as outlined (e.g., you cannot use an SBA loan to purchase an investment property or non-business luxuries). Additionally, you usually can’t refinance personal debt with an SBA startup loan. Borrowers have to open a separate business bank account and keep clear records of how the loan is spent. While these aren’t exactly “cons” (since prudent use of funds is always recommended), it means once you get an SBA loan, you need to stick to the business plan and budget you presented.
5. Franchise Approval and Oversight: Not every franchise is automatically eligible for SBA financing. The SBA used to maintain a Franchise Directory to simplify eligibility, but as of May 2023 the SBA stopped maintaining its Franchise Directory, putting the onus on lenders to determine if a franchise meets affiliation rules. Many lenders now rely on third-party vetting (such as FranData’s franchise registry) to see if a franchise brand is qualified for SBA loans. If your franchise system has a history of litigation or instability, it might be harder to get an SBA loan for it. Moreover, the SBA loan closing process will involve reviewing the franchise agreement for any clauses that conflict with SBA rules. This can sometimes require addendums or adjustments, adding another layer of complexity to closing the loan.

Is an SBA Loan Right for Your Franchise?

Choosing an SBA franchise loan comes down to weighing these pros and cons against your situation. If you have the time and meet the qualifications, an SBA loan can be a fantastic financing tool – offering low rates, long repayment, and manageable down payments. It’s especially useful for first-time franchise owners who need a substantial loan amount and might not secure one otherwise. Many successful franchisees have gotten their start with the help of an SBA 7(a) loan.

On the other hand, if you need funding in a pinch, or if you balk at putting your personal assets on the line, you might explore alternatives. Some alternatives include conventional bank loans (for those with very strong finances), franchisor financing programs, tapping home equity, or even rollover of retirement funds (ROBS) for those willing to use that route. Each option has its own pros/cons, but none quite match the combination of affordability and support that SBA loans provide.

In 2025, SBA loans remain a cornerstone of franchise financing, backed by a government commitment to small business growth. The SBA’s continued fee waivers for smaller loans and its partnership with an expanded network of lenders (including fintech lenders entering the SBA program) mean franchise entrepreneurs have even more opportunities to secure funding. Just go in with eyes open: prepare for a detailed application, make sure you qualify, and understand the obligations you’re signing up for.

Conclusion

An SBA franchise loan can be the wind beneath your wings as you launch your franchise – but it’s crucial to navigate the process correctly. If you’re considering an SBA loan for your franchise, start by evaluating your eligibility and preparing a strong application package. At Liberty Franchise Lending, we specialize in guiding franchise owners through financing decisions. Our team can help you weigh the pros and cons, pre-qualify for an SBA loan, and even explore alternative funding if needed. We’ll work with you to determine the best path forward for your franchise dream.

Ready to take the next step? Contact Liberty Franchise Lending today for a free consultation on financing your franchise. Whether you pursue an SBA loan or another solution, our experts will help get you the funding you need to build your business. Don’t let the opportunity pass – reach out now and let’s take you to the finish line of franchise ownership with the right loan in hand!