SBA rules · SOP 50 10 8.1

Can an SBA loan be used to buy a franchise?

Yes, an SBA 7(a) or 504 loan can be used to finance the purchase of a franchise, provided the brand is listed on the SBA Franchise Directory and the proceeds comply with program rules.

Quoted from SBA SOP 50 10 8.1Every quote checked word for word

In detail

Franchise Directory requirement: If the brand meets the FTC definition of a franchise, it must be listed on the SBA Franchise Directory in order to obtain SBA financing.
7(a) loan proceeds: A 7(a) loan can finance start-up costs, real estate, equipment, working capital, and intangible assets such as goodwill or franchise fees.
504 loan restrictions: A 504 loan can only finance eligible long-term fixed assets such as real estate or machinery; it cannot finance working capital or intangible assets such as goodwill or franchise fees.
Ineligible franchise agreements: Franchise Development Agreements (Master Franchise Agreements) where income comes from royalty payments from other franchisees are passive and ineligible, though area development rights where the franchisee owns and operates the units may be eligible.
Management company restrictions: Franchisees operating under a management agreement are ineligible if the management company is affiliated with the franchisor or has sole discretion over operations.

The source

What the SOP says

“If the Applicant’s brand meets the FTC definition of a franchise, it must be on the Directory in order to obtain SBA financing.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > The SBA Franchise Directory: (lines 548-555)✓ Verified

“The 504 Project finances only the costs associated with eligible long-term fixed assets; the acquisition of any other assets such as receivables or goodwill is not an eligible use of 504 loan proceeds or Third Party Loan proceeds and must be financed by other means, which may include a 7(a) loan;

SOP 50 10 8.1, Chapter 1: Eligibility through Submission of Application > Change of Ownership (lines 3342-3353)✓ Verified

“A 7(a) loan may be used to finance a change of ownership that includes intangible assets (including, but not limited to, goodwill, client/customer lists, patents, copyrights, trademarks, intellectual property, and agreements not to compete) as long as the financial due diligence requirements set forth in Paragraph C.1 of this Appendix are met.

SOP 50 10 8.1, Appendix 15: 7(a) Changes of Ownership > Intangible Assets (lines 5046-5047)✓ Verified

“Franchise Development Agreements (also known as a “Master Franchise Agreements”) provide the developer with a geographic area with which to establish additional franchise units. These additional franchise units are owned and operated by other franchisees, and the developer’s income is derived from the royalty payments from each franchisee in the developer’s geographic territory. Based on those features, these agreements have been determined to be passive and, therefore, an Applicant that is or will be operating under a Franchise Development Agreement is not eligible for SBA financial assistance.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Applications involving Franchise Development Agreements or Area Development Rights: (lines 599-602)✓ Verified

“If the Applicant franchisee is operating under a management agreement where the management company is, or is affiliated with, the franchisor, the Applicant is not eligible.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Franchise Applicants with Management Agreements: (lines 603-612)✓ Verified

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