Before You Borrow: Three Questions Every Franchise Owner Should Ask

Expert Source & Author: Kunal Bhasin, Founder & CEO of 1West

Franchise ownership is often sold as “entrepreneurship with a playbook.” That’s true, right up until you reach the part of the playbook that says capital. Then you realize something quickly: a franchise may come with brand recognition and standards, but it still lives and dies by the same thing every business does: cash flow.

Debt can be a growth lever. It can also be a slow leak you don’t notice until it becomes a flood. Franchise debt tightens the screws fast because your obligations don’t stop at loan payments. You’ve got royalties, marketing funds, vendor requirements, buildout timelines, hiring ramps and very little room for error.

So before you apply for a small business loan, step back. The goal isn’t to “get approved.” The goal is to borrow in a way that makes the business stronger. Before applying for a small business loan, entrepreneurs should take a step back and make sure the capital they’re seeking aligns with their long-term goals rather than creating additional challenges they’ll have to address in the future.

Here are the three questions any franchise owner should answer before they ever fill out an application.

What is the exact purpose of the loan and how will it generate a return?

It’s not enough to know you need funding, you should know exactly why you need it and what impact it will have on your business. Lenders want to see that you have a clear use case, whether it’s expanding operations, purchasing equipment, or smoothing out cash flow. More importantly, you need to be confident that the capital will help generate additional revenue or efficiency that justifies the cost of borrowing.

Franchising makes it easy to confuse movement with progress. That said, here are a few quick gut checks:

• Buildout costs can be smart, but the return depends on ramp time. If you’re borrowing for tenant improvements, ask: How many weeks of revenue “dead air” can we absorb if construction and training runs long? 
• Equipment is logical only if it reduces labor, increases throughput, or prevents downtime. Otherwise you just financed something shiny. 
• Working capital should have a job description. Are you bridging receivables, funding inventory ahead of demand, or covering an operational model that isn’t working yet?

Here’s the operator test: if you can’t explain the ROI in one sentence, you’re not ready to borrow. Not because you won’t get approved, but because you might get approved for the wrong reason.

A simple framework to consider:

• Revenue driving: marketing, additional unit capacity, new location expansion.
• Margin improving: equipment that reduces waste or labor, operational upgrades.
• Risk reducing: stabilizing cash flow and creating cushion for predictable volatility.

If the purpose doesn’t fit cleanly into one of those buckets, you’re not done thinking.

Can my business realistically support the repayment schedule, even if things get weird?

Before taking on debt, closely review your cash flow and margins. A steady or predictable stream of revenue is essential for staying current on payments. I often tell founders to stress-test their finances by asking themselves: “If my revenue drops by 20%, can I still cover this loan?” That kind of preparation helps avoid taking on unnecessary financial strain.

For franchise owners, that stress test matters more because your fixed costs are not just rent and payroll. You also have contractual expenses that behave like fixed costs: royalties, marketing fund contributions, technology fees and vendor requirements, minimum staffing levels, and the training costs that come with turnover.

When people analyze repayment, they usually look at revenue. That’s the wrong metric. The real story is debt service coverage, meaning how much free cash is left after the system takes its share.

Run it like this:

1. Start with your average monthly revenue, not your best month.
2. Subtract cost of goods and direct labor.
3. Subtract franchise fees, including royalties, marketing fund, and recurring system fees.
4. Subtract rent and utilities.

Look at what’s left. That’s the pool you’re asking to cover your loan payment plus the unexpected.

Then ask the uncomfortable follow up questions. What happens if revenue dips for a quarter, labor costs spike, or a remodel requirement shows up early? If your repayment plan only works when everything goes right, you don’t have a plan. You have hope with a payment schedule.

Also make sure the repayment cadence matches business reality. Daily or weekly repayment structures can work for some models, but franchise owners with payroll cycles, vendor terms, or seasonal swings should be cautious. Your loan terms should translate to breathing room, not panic.

Do I fully understand the loan terms and the total cost of borrowing?

Interest rates are important, but they don’t tell the full story of a loan. Make sure you review and understand all fees, the repayment structure, and whether the loan has prepayment penalties or variable rates. The right loan should give you flexibility, not limit it.

This is where smart operators get ambushed because the paperwork rarely highlights what matters in plain English. So convert every offer into three numbers:

1. Total payback amount: what will you repay in dollars over the full life of the financing?
2. True monthly cost: what is the real cash leaving the business each month or week?
3. Flexibility cost: what do you lose if your plan changes, including fees, penalties, covenants, or forced refinances?

For franchise owners, add a fourth lens: what happens when you want to expand?

A loan that makes sense for your first unit can become a handcuff when you’re trying to acquire a second or third. Watch for structures that punish momentum, like prepayment penalties, limits on additional borrowing, compounding personal guarantees across units, or reporting requirements that become a drag as you scale.

And here’s the non-negotiable: if you can’t compare offers apples-to-apples, you’re not shopping, you’re guessing. Ask for a clear breakdown that includes fees, repayment schedule, whether rates are fixed or variable, and any penalties. If a lender can’t give you a clean view, walk away. Clarity is part of the cost.

Borrowing should be strategic

Franchise owners are builders. They move fast and solve problems in real time. But financing punishes impulse. Borrowing is one of the few decisions where optimism has a measurable price tag.

The best time to think clearly about debt is before you’re under pressure. Before equipment breaks. Before a landlord deadline. Before an expansion opportunity forces a rushed decision.

So yes, apply for funding when it helps you grow. But do it with clarity. Know the purpose and the return. Stress-test your ability to repay. Understand the full economics and the flexibility.

Because the businesses that last aren’t the ones that “get capital.” They’re the ones that use capital to buy something specific: time, leverage, and durable profitability.

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About the author:

Kunal Bhasin is the Founder and CEO of 1West, a next-generation small business financing marketplace that has deployed more than $500 million to over 10,000 SMBs across the U.S. With more than15 years in the lending industry, Kunal is a recognized voice in fintech innovation and small business finance. He frequently appears in media outlets and shares his insights on small business lending, transparency in finance, and the policies shaping access to capital.