What Does the SBA Rulebook Say About Franchise Fees?
A lot of franchise buyers are told the SBA flatly prohibits financing the franchise fee. The rulebook doesn't say that. SBA SOP 50 10 8.1, effective October 1, 2026, has a section called "Restrictions on Uses of Proceeds" that lists what loan money can't pay for.[1] The list includes payments to associates of the business, floor plan financing, property held for investment, delinquent trust-fund taxes, and a few others under 13 CFR 120.130.[3] The initial franchise fee is not on it.
What the SBA does set is your minimum equity. For a start-up (a business operating one year or less), the SOP calls for an equity injection of at least 10% of the total project costs, defined as "all costs required to become operational, regardless of the source of funds." The franchise fee is a cost of becoming operational, so it counts toward the total that your 10% is figured on.
Why Do Some Lenders Still Want You to Pay the Fee in Cash?
The SBA sets a floor, and each lender decides what it needs above that floor. The SOP tells lenders to judge whether your equity is enough based on the type of business, your management experience, and the competition in your market (13 CFR 120.150). When a lender asks you to pay the franchise fee yourself, it is usually weighing a few things:
- Little collateral value: The fee buys a right to use the brand and system, not equipment or property the lender could sell if the business fails
- Money at risk: Cash you put into the deal shows commitment
- Its own credit policy: Many banks have internal rules on intangible costs that go beyond the SBA's minimums
None of these is an SBA prohibition. If one lender won't include the fee, another SBA lender may.
What Goes Into Total Project Cost?
SBA 7(a) loans can cover the costs of opening a franchise unit. If you're buying an existing franchise unit, the transfer fee is part of the acquisition cost too.[2]
Franchise Fees
- Initial franchise fee paid to the franchisor
- Transfer fee, if you're buying an existing unit
Equipment and Fixtures
- Kitchen equipment (for food franchises)
- Point-of-sale systems
- Furniture and fixtures
- Specialized equipment required by the franchisor
Buildout and Construction
- Leasehold improvements
- Construction to meet brand standards
- Signage (interior and exterior)
- Parking lot improvements
Inventory and Supplies
- Opening inventory
- Initial supplies
- Uniforms and branded materials
Working Capital
- Operating reserves
- Initial marketing beyond required fees
- Rent deposits (in some cases)
Real Estate
- Property purchase
- Land acquisition
- Building construction
Worked Example: A $230,000 Franchise Start-Up
| Cost | Amount |
|---|---|
| Franchise Fee | $40,000 |
| Equipment | $80,000 |
| Buildout | $90,000 |
| Working Capital | $20,000 |
| Total Project Cost | $230,000 |
The SBA floor is 10% of $230,000, or $23,000. The same project can look different depending on the lender:
| Lender approach | Your equity | SBA loan |
|---|---|---|
| Fee included in the loan, equity at the SBA floor | $23,000 | $207,000 |
| Lender wants the fee paid from your cash | $40,000 | $190,000 |
In the second case your $40,000 fee payment is your equity injection, and it already clears the $23,000 floor. A lender can also ask for more than either figure based on your experience and the market. Get its number in writing before you sign the franchise agreement.
What Should You Ask Your Lender?
- Will you include the initial franchise fee in the loan, or do you want it paid from my cash?
- What equity injection will you require on this project, as a dollar amount and as a percentage of total project cost?
- If I've already paid the franchise fee, will you count it toward my equity injection, and what proof do you need?
- How do you treat a fee the franchisor lets me pay over time?
- Is this requirement your bank's policy or an SBA rule? If they say SBA rule, ask where it appears in SOP 50 10 8.1.
What If You Can't Cover the Equity?
Ask More Than One SBA Lender
Lenders treat intangible costs differently. If one wants the fee in cash and you can't do it, ask others how they handle franchise fees.
Choose a Lower-Fee Franchise
Franchise fees range from under $10,000 to over $100,000. A lower fee shrinks both your total project cost and the cash a conservative lender will ask for.
Negotiate with the Franchisor
Some franchisors offer:
- Fee payment plans (portion at signing, balance over time)
- Reduced fees for veterans or multi-unit commitments
- Area development pricing
Note: Deferred fees may still need to be accounted for in your lender's cash flow analysis.[4]
Use ROBS (Rollover for Business Startups)
You can use retirement funds (401k, IRA) to invest in your franchise through a ROBS structure, without early withdrawal penalties. This is complex and requires professional setup.
Find an Investor Partner
A partner who contributes equity can help close the gap. Make sure any partner with 20%+ ownership is prepared to sign personal guarantees.
What Mistakes Should You Avoid?
- Assuming the SBA forbids financing the fee: It doesn't. Ask your lender how it handles the fee before you plan your cash
- Assuming every lender will finance it: The SBA allows it, but your lender may still want it in cash
- Leaving the fee out of total project cost: Your 10% is figured on all costs required to open, fee included
- Using credit cards for the fee: Borrowed money counts as equity only in narrow cases, such as a personal loan repaid from a source other than the business's cash flow; a card balance doesn't qualify
- Underestimating total cash needs: Add up equity, closing costs, and reserves before committing