What Lenders Really Look For in a Franchise Loan Application

When you apply for a franchise loan, it might feel like you’re under a microscope – and in some ways, you are. Lenders will scrutinize various aspects of your personal and business qualifications to decide if you’re a good risk for a loan. Understanding what lenders really look for in a franchise loan application can give you a significant advantage. By anticipating their questions and expectations, you can prepare a stronger application that increases your chances of approval and possibly even secures better terms (like a lower interest rate).

Whether you’re seeking an SBA loan for a new franchise or a conventional loan to expand an existing franchise business, here are the key factors virtually every lender will evaluate:

1. Strong Personal Credit History

Your personal credit score and credit report will play a major role in a lender’s decision. This is true even if you’re forming a business entity for the franchise – as a new business, it won’t have its own credit track record yet, so the lender leans on your personal credit as an indicator of how you manage debt. Lenders look for a solid credit score (generally, the higher the better). Typically, a FICO score in the high 600s might be a minimum, while scores 700+ make you a much more attractive candidate. Excellent credit (750 or above) can potentially help you secure larger loans or slightly lower rates.

Beyond the score, they’ll examine your credit history: Do you pay your bills on time? Do you have any late payments, collections, or bankruptcies? How much outstanding debt do you carry relative to your limits? A history of on-time payments and responsible credit use signals that you’re likely to repay the new loan reliably. If there are blemishes on your report, be prepared to explain them. Sometimes life events cause credit hiccups; a lender may be understanding if you provide context and show that you’ve rebounded.

It’s a good idea to check your credit report before applying. Correct any errors you find and be ready to address any negatives. Also, avoid taking on new debt or credit inquiries right before applying, as those can temporarily ding your score. Bottom line: lenders want to see that you have a track record of honoring your financial obligations.

2. Sufficient Equity Injection (“Skin in the Game”)

Very few lenders will finance 100% of a franchise’s cost. They almost always require the borrower to invest some of their own money into the project – this is often referred to as the down payment or equity injection. It demonstrates that you have “skin in the game.” From the lender’s perspective, if you’ve put your own cash on the line, you’re more likely to work hard and not walk away when challenges arise.

For franchise loans, the required down payment is typically in the range of 10% to 30% of the total project cost. The exact amount depends on the loan program and how risky the lender perceives the deal. SBA 7(a) loans commonly require around 20-25% down for a new business; some lenders might accept 15% if other factors are strong. For instance, a bank might expect you to contribute $50,000 on a $250,000 startup. There are scenarios (say, if you have collateral or a partner) where this could be lower, but plan on needing a solid chunk of cash.

Post-closing liquidity is also considered. After you inject your down payment, do you have any cash reserves left? Lenders worry if a borrower scrapes together every last penny for the down payment and has nothing left for working capital. Many want to see that you’ll still have some savings as a cushion. This again goes to confidence that you can handle early business expenses or hiccups.

To satisfy this requirement: be ready to show bank statements or asset statements that prove you have the funds for the down payment and some extra. These funds often need to be your own (or perhaps gifts from family, documented properly), not another loan. For SBA loans, borrowing your down payment is generally not allowed – it must be injection from you.

3. Collateral and Security

While not always a deal-breaker, collateral can strengthen a franchise loan application. Collateral is an asset that the lender can claim if you default on the loan. For business loans, typical collateral includes business assets like equipment, inventory, or real estate. Many franchise startups don’t have much collateral initially (except maybe equipment), so lenders often look to personal assets. The most common personal collateral is equity in your home (if you own a home).

For SBA loans, the rules on collateral are: if the loan is over a certain amount (currently $25,000 for 7(a) loans), the lender is required to take collateral when available, but the loan won’t be declined solely due to lack of collateral if everything else is good. That said, lenders often do require a lien on your house if you have significant equity, particularly for larger loans. Some specialized franchise lenders might not, focusing more on cash flow. However, a collateral shortfall could make the lender a bit nervous, so they’ll scrutinize other factors more heavily to compensate.

If you have assets like a second property, stocks, or other valuables, you can mention these in the application. While you might not want to pledge everything, showing that you have assets provides additional assurance to the lender of your financial stability. In some cases, you might use specific collateral for part of the financing (for example, an equipment lease covers the kitchen equipment, while the main loan covers the rest).

Personal guarantees are almost always required. This isn’t physical collateral, but it is your legal promise that you’ll repay from personal assets if the business can’t. Virtually all franchise loans will have you sign a personal guaranty (and your spouse too, if you’re married in a community property state or if they co-own assets). So while your new LLC might be the borrower, you personally stand behind it in the eyes of the lender.

In summary, lenders look for what could backstop the loan. The presence of collateral can sometimes make up for other weaknesses (like a slightly lower credit score or limited experience), whereas if you have no collateral at all, the rest of your application likely needs to be very strong.

4. Franchise Brand and Industry Viability

When lending to franchisees, banks don’t just consider you; they also consider the franchise brand and the industry you’re entering. The franchise itself has a track record (or if it’s new, the lack of one). Lenders prefer franchises that are established, with a history of successful franchisee operations. For example, financing a Dunkin’ or UPS Store or Servpro (well-known, longstanding franchises) is seen as less risky than an unknown, brand-new franchise concept with only a handful of units.

Many lenders maintain lists of approved or preferred franchise brands. Some participate in the SBA’s Franchise Directory program (or now rely on the FranData verification since the SBA directory ended) to streamline evaluating the franchise’s eligibility. If your chosen franchise is on these lists, it can expedite your loan because the lender knows the concept, perhaps has financial performance data, and trusts that the franchisor provides solid support.

They’ll look at factors like:

• Business Model Resilience: Is this concept performing well currently? (e.g., quick-service restaurants as a category are doing well, whereas certain retail niches might be struggling).
• Franchisor Support: Does the franchisor offer good training, marketing, and assistance to new franchisees? A strong franchisor can be a plus in the lender’s eyes.
• Unit Economics: Lenders may peek at the average revenues and margins of existing franchises in the system (some franchisors provide this info publicly in Item 19 of the FDD). If the average unit revenue of the franchise suggests that you’ll comfortably cover the loan payments and make a living, that’s reassuring.
• Franchisee Success Rate: Although exact data might not be accessible, lenders get a sense of how often franchisees of a brand default on loans. For instance, if a particular brand had many SBA loan defaults (which is something that can be looked up in SBA data), a lender might be cautious.
• Industry Trends: If the franchise is in a booming industry (say, home services with high demand or a trendy fitness concept with growth in popularity), lenders know tailwinds exist. If it’s in an industry facing headwinds (maybe traditional retail facing e-commerce pressure), they’ll be more careful.

You as the applicant can’t change the franchise’s fundamentals, but you should be prepared to sell the choice of franchise in your business plan. Show that you did your due diligence, that the brand is a leader or strong contender in its market, and mention any stats that support its performance. Essentially, you want the lender to buy into the franchise concept along with you.

5. Business Plan and Financial Projections

A comprehensive business plan is a must for a franchise loan application, especially if you’re a startup. This plan shows the lender that you understand the business you’re getting into, have a strategy for success, and have thought through the financials. In fact, the business plan and projections are often the primary basis on which a lender judges the viability of the loan – will the business generate enough profit to repay the loan?

Key elements lenders look for in the plan:

• Executive Summary: A clear overview of the franchise, location, your credentials, and the loan request. Busy loan officers appreciate a concise summary that highlights the important points up front.
• Management and Experience: A section about you (and any partners or key hires). Lenders want to see that the business will be led by someone capable. Do you have relevant experience in the industry or in business management? For instance, if you’re opening a restaurant franchise and you have 5 years of restaurant manager experience, that’s a big plus. If you don’t have direct experience, emphasize transferable skills (leadership, customer service, financial acumen) or mention that you’ve hired an experienced manager.
• Market Analysis: Show that you understand your local market. Who are your target customers? Who are the competitors in the area? Why is there a demand for this product/service in your territory? Lenders are essentially being convinced that your particular location will perform well.
• Marketing Plan: How will you attract customers once you open? Even though franchisors have marketing programs, you should outline local marketing efforts – grand opening promotions, community outreach, digital marketing, etc. A proactive plan indicates you won’t just “build it and they will come.”
• Financial Projections: This is absolutely critical. Provide projected profit and loss statements, cash flow statements, and balance sheet for at least the first two to three years. Lenders will go straight to the numbers to see if it all makes sense. Your projections should be realistic – based on the franchisor’s data or similar businesses – not overly optimistic. Show the monthly breakdown, because they want to see when you hit breakeven and if you have enough cash to get there. Importantly, include the loan payments in your cash flow projections to demonstrate that you can service the debt.
• Assumptions: Along with the numbers, write out the assumptions you used. For example: “We assume an average monthly sales of $X by month 6, based on the performance of other franchise units in similar markets provided in the FDD. We assume cost of goods sold at 30%, labor at 25%, etc., based on franchisor benchmarks.” This helps lenders see that you did your homework and aren’t just guessing.
• Break-Even Analysis: Identify the level of sales needed to cover all costs. If that seems achievable given your market analysis, it reassures the lender.
• Use of Funds: Clearly outline how the loan (and your down payment) will be used – $X for equipment, $Y for build-out, $Z for working capital, etc. This ties the loan request to real needs and shows you’re not borrowing arbitrarily high amounts.

In many ways, the business plan is also a test of your professionalism and commitment. A well-prepared, thoughtful plan tells the lender that you’re serious, detail-oriented, and likely to be a good business operator. Conversely, a sloppy or canned plan raises doubts.

6. Cash Flow and Debt Service Coverage

Ultimately, lending comes down to numbers – will you make enough to pay us back? Lenders perform their own analysis on your financial projections (or on historical financials if you’re an existing operation looking for expansion capital). One key metric they use is the Debt Service Coverage Ratio (DSCR). This ratio = (Projected Annual Cash Flow) / (Annual Loan Payments). If this ratio is comfortably above 1, it means you should have enough earnings to cover the loan payments with some cushion.

For example, many lenders want to see a DSCR of around 1.25 or higher. That means you’re generating 25% more cash than needed to pay your debt. Some might accept 1.15, some require 1.3 – it varies. If your own projections show, say, $50,000 available for debt payments (after all operating costs and owner’s draw/salary) and the annual loan payments are $40,000, then DSCR = 1.25. That’s decent. If it was only $45,000 cash for $40,000 payments (DSCR 1.125), they might worry that’s cutting it thin.

They’ll also consider personal debt obligations as part of overall cash flow analysis. If you have a lot of personal debt payments, they factor into the equation because heavy personal obligations could pressure you to pull money out of the business.

Lenders might do sensitivity analysis: What if sales are 10% lower than projected? Does DSCR drop below 1? If so, how would the borrower handle it? They might ask you those questions. Be prepared to discuss a backup plan (like accessing a line of credit or reducing expenses) if things start slower than expected.

If you’re buying an existing franchise unit (as opposed to starting new), lenders will heavily weigh the historical financials of that unit. They’ll want to see tax returns or P&Ls that prove the business makes enough to pay a loan and you a living. In such cases, a DSCR based on past earnings is key. Often, lenders like to see that the business’s current cash flow could pay the new loan at least 1.3 times over.

7. Documentation and Transparency

Finally, beyond the qualitative factors, lenders look for a well-documented and complete application. Incomplete or inconsistent information raises red flags. From the lender’s perspective, if an applicant can’t organize their paperwork or isn’t forthcoming with information, what does that say about how they’ll run a business (or about whether they’re hiding something)?

Key documents typically requested include:

• Personal financial statement (listing all your assets, liabilities, monthly expenses).
• Several years of personal tax returns (usually 3 years).
• If you have any existing businesses, business tax returns and financial statements for those.
• Franchise documents: copy of the franchise agreement or franchise disclosure document (to verify franchise info and any fees/arrangements).
• Resume or background statement (to verify experience).
• Legal entity docs if you’ve formed an LLC/corp for the franchise.
• Lease or details about the site (if you have one).
• Quotations for major expenses (like build-out contractor estimates, equipment quotes).
• And of course, the business plan and projections as discussed.
• Being organized and prompt with providing documents is important. It keeps the process moving and shows professionalism. Label things clearly, double-check that everything is signed where needed, and answer all questions on application forms fully.

Full transparency is the best policy. Don’t try to gloss over something like a past bankruptcy or a lawsuit – the lender will likely find out during their due diligence (credit checks, background checks). It’s better they hear it from you with an explanation than discover it on their own. Lenders appreciate honesty and context.

Final Thoughts: Think Like a Lender

If you step back and “think like a lender,” much of what they want is common-sense: they want to minimize risk and ensure they’ll be repaid. By showing them that you are a low-risk, high-potential borrower – through good credit, personal investment, strong plan, and so on – you align your interests with theirs.

When you prepare your franchise loan application with the above factors in mind, you transform from just another applicant into a well-prepared entrepreneur that a lender may even compete to work with. Many franchisees secure financing offers from multiple banks because they present such a compelling package – a great feeling, and one that gives you choice to pick the best terms.

Next Steps

Navigating the franchise loan process can be complex, but you don’t have to do it alone. Liberty Franchise Lending has helped countless franchise owners put together winning loan applications. We know exactly what lenders are looking for and how to highlight your strengths. From polishing your business plan to connecting you with franchise-friendly lenders, we’re by your side every step of the way.

If you’re ready to pursue financing for a franchise and want to improve your approval odds, get in touch with Liberty Franchise Lending. Our experts will review your situation, help you address any weak spots, and guide you in assembling a rock-solid application that checks all the boxes for lenders. With Liberty’s support, you can approach lenders with confidence – and soon, secure the funding you need to make your franchise ownership dreams come true.