SBA loans for franchise buyers: 7(a), 504 and equity rules

Financing a restaurant franchise through the Small Business Administration involves three separate questions: which costs a loan can cover, what contribution the buyer must supply and whether the business qualifies. The 7(a) and 504 programs answer those questions differently, and a franchise brand's eligibility does not establish the borrower's ability to repay.

This guide reviews SBA requirements as of September 28, 2026. Under the agency's September 25 notice, lenders continue using the version 8 loan manual for applications submitted through September 30. Updated version 8.1 applies to applications received by SBA on or after October 1. Our October acquisition explainer covers the forthcoming earnings tests, transaction categories and financial due-diligence requirements.

7(a) covers a range of business costs#

The 7(a) program can finance changes of ownership, real estate, equipment, furniture, supplies and working capital, including combinations of those uses. Its maximum loan amount is $5 million. A franchise applicant applies through a participating lender, which handles the application and credit analysis; SBA provides a loan guaranty to the lender.

The business must satisfy SBA eligibility requirements, including size standards, U.S. operations and a reasonable ability to repay. It must also be unable to obtain the desired credit on reasonable terms from non-government sources. Eligibility and the permitted use of proceeds are parts of the review, alongside the lender's assessment of repayment.

Rates can be fixed or variable. The borrower and lender negotiate the rate within SBA's applicable maximums. Most 7(a) term loans are repaid monthly from business cash flow; a variable-rate loan's payment may change when its rate changes. A program ceiling is therefore different from a rate offered for a particular restaurant transaction.

504 finances major fixed assets#

The 504 program supports assets such as buildings, land and long-term machinery and equipment with at least 10 years of remaining useful life. It cannot finance working capital or inventory. A Certified Development Company, or CDC, is an SBA-certified nonprofit that originates the 504 financing alongside a senior lender.

The usual project structure combines at least 50% financing from a third-party lender, up to 40% through the CDC's SBA-guaranteed debenture and at least 10% from the borrower. The SBA guaranty covers the debenture, not the entire financing package.

The minimum borrower contribution rises to 15% for a new business or a project involving a limited or special-purpose property, and to 20% when both apply. The CDC must document the property's classification. For 504 purposes, a new business generally includes one operating for 2 years or less; an older business acquired by new, unproven management with increased debt unrelated to business operations can also fall within that definition. The higher contribution reduces the 504 portion of the financing.

What can count toward 7(a) equity#

For Standard 7(a) loans under the version 8 equity provisions, effective June 1, 2025, a startup generally requires at least 10% of total project costs. For this rule, a startup has generated revenue from its intended operations for 1 year or less. A complete change of ownership resulting in a new owner also requires at least 10%. Existing-owner buyouts, partial ownership changes and qualifying business expansions have separate provisions.

For startups, the calculation covers costs required to become operational; for a complete ownership change, it covers costs required to complete the transaction. Both calculations include costs regardless of funding source, except for lines of credit and 504 loans. The contribution funds part of the project costs. It is not a separate charge added on top of those same costs.

The manual permits several equity sources. These include unborrowed cash and cash from a personal loan when repayment demonstrably comes from outside the business's cash flow. Salary that the business pays its owner does not qualify as that outside repayment source.

Seller debt can count toward the required contribution for a complete ownership change when it is on full standby for the life of the SBA loan and covers no more than half of the SBA-required injection. Full standby means no principal or interest payments during the 7(a) loan term. The lender must document the agreement, and the standby creditor must subordinate its collateral rights to the lender's.

Verified prepaid expenses may also count. The lender documents those expenditures with paid invoices, canceled checks or bank statements. The lender must establish that a prepaid expense is eligible and that it has been paid.

For acquisitions covered by the October 1 manual, qualifying seller debt remains permitted, with limited equity sources collectively capped at half of the required contribution. The new manual also expressly excludes education, advisory and agent fees from eligible prepaid expenses. Those forthcoming provisions are separate from the June 2025 rules described above.

Franchise eligibility comes before loan approval#

A brand that meets the Federal Trade Commission's definition of a franchise must appear on the SBA Franchise Directory to obtain SBA financing. The manual requires lenders to check the listing before submitting a nondelegated application or approving a loan under delegated authority. An ordinary lender review of an unlisted franchise agreement does not replace that requirement.

To obtain a listing, the franchisor submits its agreement, applicable Franchise Disclosure Document and other required signing documents for SBA's eligibility review. The lender checks that the applicant's brand and agreement match the listing. The Directory itself says inclusion is neither a brand endorsement nor an assurance that the business will succeed.

What the lender documents#

For Standard 7(a) loans under version 8, the lender's credit analysis addresses business cash flow, past performance, management experience and repayment ability. Existing businesses provide historical financial information and interim statements; applications relying on projections require supporting assumptions. Individuals with at least 20% direct or indirect ownership generally must provide an unlimited personal guaranty, and additional guarantors may be required.

Before disbursing Standard 7(a) proceeds, the lender must verify the required equity injection. For cash, that includes evidence of the processed check or wire, source-account statements covering at least 30 days and proof of deposit or use at settlement. A gift letter, promissory note or financial statement alone does not establish that the money reached the transaction.