You’re building on a proven model, with brand recognition and established systems. You’re looking at premises, thinking about how your team might come together—and you can already feel what opening day will be like.
But, even successful franchisees can face unexpected hurdles when applying for finance. Whether you’re looking to acquire your first franchise, expand to a second location, or perhaps just upgrade some equipment, understanding why loans are commonly declined (and how to avoid it) is essential.
So, let’s make sure your next loan application doesn’t end with a burst bubble. Below I’ll unpack five common reasons franchise finance applications are rejected—and what you can do to improve your chances of getting that big green “Approved” stamp!
- No Clear Strategy for Loan Use
Lenders want to see that any debt you take on is part of a well-considered plan—not a ‘band-aid’ fix. Vague explanations like “contribute to setup costs”, or “additional working capital” don’t give lenders much comfort. This can make lenders hesitant and increase the risk of a decline.
How to avoid it:
- Be specific: “We’re applying for $120,000. 75% of the funds will be used to fund some new kitchen equipment, and the balance to refurbish our main seating area as part of a strategic brand refresh. The new equipment will allow us to offer additional menu items and help us increase revenue by 15%.”
- Use figures: If you’re a startup then be sure to show the lender a clear financial forecast, otherwise clearly explain the expected revenue outcomes. If the loan is refinancing an existing debt or replacing a recurring cost, be sure to highlight that.
- Tie the loan purpose to your overall business strategy!
- Poor or Limited Credit History (Business and Personal)
In the modern finance world lenders will typically assess both your personal and business credit history. And of course, if you’re just getting started, your personal credit history is really all there is for them to go on! Even with strong franchisor backing, a poor credit record is a big red flag. Late payments, payment defaults, and other adverse history can leave deep and long-lasting footprints on your credit file.
Some common flags
- Payment defaults – particularly for life or business essentials, or where those defaults are not quickly rectified.
- High levels of debt or enquiry – particularly from lenders that indicate financial stress (such as payday lenders).
The credit assessor is reaching for his red stamp in a big hurry…
How to avoid it:
- Ensure critical payments are always made on time, and don’t fall into the trap of thinking ‘it’s OK to delay’. Lenders want to see you pay your bills on-time, every-time!
- Review your credit reports early—both personal and any existing business entities.
- Settle old debts and avoid unnecessary credit applications in the lead-up to applying.
- Incomplete or Unclear Documentation
Franchise businesses often require more complex documentation. Lenders want to understand not just your financials, but also the franchise agreement, business plan, and how you’ll manage your obligations.
Frequent issues include:
- Applying in the wrong legal entity or being unclear about your business structure.
- Missing business plans—or ones that haven’t been tailored to the specific franchise or market—can hurt your chances.
- Financial forecasts that are missing critical components or are wildly unrealistic.
- Incomplete disclosure documents.
OK, we know where this is going…
How to avoid it:
- Gather all necessary documents early: business plans, financial forecasts, franchise agreement, franchisor disclosure statements.
- Make sure your business name is correct (and the same) across all your important documents, from premises lease to franchise agreement.
- Be ready to explain your business operations, competitive advantage, and local market context.
- Weak or Inconsistent Cash Flow
Cash flow is the lifeblood of any business—and lenders scrutinise it closely. Even if your business is turning a profit, uneven cash flow (due to seasonality, rising costs, or underperformance) can make a loan seem risky.
Here’s an example:
A café franchise in a holiday-heavy coastal town might do 60% of its revenue between November and February—but show lean months outside that window. Your lender wants to know that you’ll still be able to make your payments in those quieter months, if they’re not sure then they’re not going to say ‘yes’…
How to avoid it:
- If your business has seasonal swings, explain how you manage them—whether that’s through staffing, supplier terms, or off-peak promotions.
- Use an accounting system or reports that allow you to show month-by-month turnover and show that you understand the timing of your revenue.
- Applying for the Wrong Type of Finance
Franchise owners often underestimate how many finance options exist—and choosing the wrong one might lead to rejection or perhaps worse (like repayments that strain your business).
Examples of mismatches:
- Using an unsecured loan for long-term equipment that would be better suited to asset finance.
- Seeking a term-loan to cover short term cash-flow needs such as seasonality, and then paying interest for money you don’t need.
How to avoid it:
- Talk to a specialist in franchise finance—preferably one who understands your industry segment.
- Compare product types: secured vs unsecured, fixed vs variable, term loan vs overdraft, etc.
- Match the loan term to the asset’s useful life—for example, a fit-out or equipment loan should typically align with the expected number of years you’ll use those assets.
Bonus Tip: Leverage Your Franchisor Relationship
Lenders often take confidence from strong franchise systems. If you’re part of a well-known or proven brand, make that front and centre. Some lenders even have pre-approved franchise lists (accredited franchise networks), which can streamline the process.
Here’s some ways to use this to your advantage:
- Include franchisor training details, support systems, and brand reputation in your application.
- If possible, supply benchmarking data showing average turnover or success rates across the network or from other similar stores.
- If your franchisor has referred you to a specific lender or broker, that’s often a strong signal.
Franchise businesses can be attractive to lenders but that doesn’t mean your loan approval is guaranteed. Understanding the common pitfalls and taking proactive steps to avoid them can significantly improve your funding approval chances.
Before you apply, ask yourself:
- Can I clearly explain how the funds will be used?
- Is there a black mark on my credit history that I could fix or explain?
- Is my paperwork ready, complete, and accurate?
- Do my financials or forecasts show I can repay the loan?
- Am I applying for the right type of loan?
And remember, if you’re unsure on any of these, you’re not alone. It’s ok to seek some expert advice before applying for finance—and it often makes all the difference.
So make sure you speak to your franchisor, lean on your accountant, and work with a finance expert who understands the unique challenges and opportunities of franchising to help you get that big green tick of approval!