Franchising remains one of the largest and most stable corners of the small business economy and one where financing decisions carry outsized weight. The franchisee's success is tied as much to how the deal is capitalized as to how well the location is run. Two significant developments this year are reshaping that landscape: a change to how SBA lenders evaluate smaller franchise loans, and the broader SBA lending cap expansion.
The scale of the industry
Franchising is a meaningful share of the U.S. economy. The sector is projected to generate $920 billion this year, employing approximately 8.9 million workers. Quick-service restaurants account for the largest single share of that output at roughly $375 billion. Personal services (senior care, fitness, beauty) at $148 billion and business services at $108 billion follow behind.
Median total investment for a U.S. franchise runs approximately $250,000, though the range is wide by category: food service concepts typically require $300,000 to $1.5 million depending on the brand, service-based franchises generally fall between $100,000 and $500,000, and home-based or low-overhead models can start under $100,000. Most franchisors require liquid capital in the range of 20–30% of total investment and a minimum net worth between $300,000 and $1 million, though this varies significantly by brand and unit count.
SBA franchise financing is primary mechanism... with a meaningful change underway
SBA loans remain the most common financing product for franchise purchases. The 7(a) program alone funded approximately $10 billion in franchise-related loans in the most recent fiscal year. But the underwriting process for smaller franchise loans has changed materially. If you're evaluating financing now, there are certain things to understand.
Underwriting:
- Effective March 1, 2026, the SBA discontinued its requirement that lenders prescreen 7(a) loans (loans of $350,000 or less) using the FICO Small Business Scoring Service (SBSS) score, per supplemental guidance (Notice 5000-876777) of the Procedural Notice. The SBSS score had functioned as a standardized, automated credit screen for smaller SBA loans for years. Going forward, federally regulated lenders must instead apply the same commercial credit analysis processes they use for their comparable non-SBA loans: review credit history, debt service coverage, recent bank statements, and (where applicable) franchise-specific factors like the number of failed franchisees in the system and the cash flow projections provided by the franchisor.
DSCR:
- The SBA's new rules also establish a hard floor: applicants must demonstrate a debt service coverage ratio (DSCR) of at least 1.1:1 on a historical or projected basis. If an applicant doesn't meet that threshold, the loan must be processed as a standard 7(a) loan or an SBA Express (up to $500,000). Lenders can continue using their own established scoring models in the Express program, which may make it a faster path for some borrowers requiring smaller amounts of capital.
Brand matters:
- For franchisors, this shift raises the importance of what lenders can independently verify about the system. FRANdata's Franchise Registry — used by more than 9,000 lenders — and tools like its FUND Score, available for systems with 50 or more units, become more relevant in a post-SBSS environment. Because lenders no longer have a single standardized score to lean on they are weighing brand-level performance data more directly.
What the new $10 million SBA cap means specifically for franchise development
With the SBA's lending cap change, borrowers may combine financing both 7(a) and 504 loans for up to $10 million total, up from a $5 million combined ceiling. For single-unit, lower-investment franchise concepts, this changes essentially nothing; most franchise loans fall well under the old $5 million ceiling to begin with, at an average loan size in the low-to-mid six figures.
Where it matters is for multi-unit developers and higher-capex concepts. These are the large-format restaurants, hospitality, healthcare-adjacent franchises, and similar categories where buildout and real estate costs can push a project's total financing need past what a single SBA loan could historically cover. For these borrowers, the ability to sequence a 7(a) loan for equipment and working capital with a separate 504 loan for real estate reopens SBA financing as a viable option. Historically, franchise borrowers were forced into conventional bank debt at less favorable terms once they crossed the combined threshold.
SBA franchise financing and lending
SBA 7(a) pricing is generally a better cost of capital than conventional franchise financing. Alternative loans generally carry higher down payment requirements (15–20%, versus 10–20% typical for SBA) in exchange for fixed-rate predictability.
Broader industry data underscores that franchised businesses generally perform better on SBA-guaranteed debt than independent businesses in the same sector. This is a pattern lenders and investors have long cited as one reason franchise concepts, particularly those with an established track record, find it easier to secure financing than a comparable independent startup. Default risk still varies substantially by category: licensed, recurring-revenue franchise models (healthcare-adjacent services, for example) tend to default at meaningfully lower rates than capital-intensive, high-turnover categories.
The practical takeaway
For franchisees evaluating financing now: know your DSCR before you approach a lender. Ask prospective lenders directly whether they're continuing to use SBSS internally or moving to their own credit model, since the answer affects both your approval odds and your processing timeline.
For franchisors: the shift away from a standardized SBSS threshold puts more weight on the quality and transparency of the financial performance data your system provides to lenders. Brands that invest in clean Item 19 disclosures, accurate system-level performance data, and active participation in the Franchise Registry are better positioned to keep capital flowing to their pipeline. Franchising remains one of the largest and most stable corners of the small business economy and one where financing decisions carry outsized weight. The franchisee's success is tied to how well the deal is capitalized and how well the business location is run.
Two significant developments this year are reshaping that landscape: a change to how SBA lenders evaluate smaller franchise loans, and the broader SBA lending cap expansion. For both new entrepreneurs and owners expanding an existing business, understanding the business plan, business structure, and available funding programs is essential.
