Written By: Khushboo Verma

Franchising is often seen as a safer way to enter business ownership. The brand is established, the operating model is proven, and demand already exists. But when investors approach banks for funding, reality hits hard. Many franchise loans in India get rejected at the first screening stage.

First-time franchise investors are often surprised to learn that loan rejections rarely have anything to do with the franchise brand. Banks reject applications because of gaps in documentation, financial planning, or the borrower's profile. Many rejected investors are capable and financially disciplined. They just approach the financing process incorrectly.

This article explains why franchise loans get rejected, what banks evaluate, and how investors structure their applications to get approved.

The Hidden Reality of Franchise Financing in India

On paper, banks promote MSME and business loans. In practice, franchise financing operates in a grey zone. Unlike salaried loans, there is no fixed formula that ensures approval. Each bank has its own internal risk assessment, especially for first-time entrepreneurs.

Most franchise loans in India are processed under one of these categories:

• MSME term loans
• SME working capital loans
• CGTMSE-backed collateral-free loans (up to ₹10 crore coverage as of 2025)
• NBFC business loans

Despite these options, approval rates remain inconsistent because franchising sits between entrepreneurship and retail risk. Banks do not fund brand names. They fund borrower credibility and cash flow certainty.

According to industry estimates, approximately 40% of MSMEs struggle with access to adequate credit, which directly impacts franchise investors seeking funding. Moreover, the average business loan approval timeline ranges from 7 to 15 working days, depending on the bank and documentation quality.

Reason 1: Weak Personal Financial Profile of the Investor

The most common reason franchise loans get rejected has nothing to do with the franchise itself. Banks first assess the individual behind the business.

Key red flags include:

• Credit score below 700 (banks prefer 750+)
• Multiple existing EMIs
• High unsecured loan exposure
• Recent defaults or restructuring history
• Credit utilization ratio above 60 to 70%

For banks, a franchise outlet is still a new business. If the promoter has a shaky repayment track record, the application is flagged early. According to lending standards in 2025, a credit score of 750 or above is considered excellent for business loan approval, with higher scores increasing approval chances with favorable terms.

What experienced investors do differently is simple. They clean up personal liabilities before applying. Credit cards are settled, personal loans are reduced, and credit utilization is controlled at least six months in advance. This single step alone improves the success rate of franchise loans in India more than any brand selection tactic.

Table showing how credit scores impact franchise loan approvals in India 

Reason 2: Overdependence on the Brand Name

Many applicants assume that choosing a well-known franchise brand guarantees loan approval. It does not.

Banks are cautious even with national brands because outlet-level performance varies by location, rent structure, and operating efficiency. A strong brand does not eliminate business risk.

Loan rejections happen when investors fail to demonstrate:

• Local demand assessment
• Realistic revenue assumptions
• Rent-to-revenue alignment

Banks expect proof that the specific outlet location can generate predictable cash flow. Without this, the brand name alone carries limited weight. Industry benchmarks suggest retailers should maintain a rent-to-revenue ratio of 5 to 10% of gross annual sales, while restaurants and quick-service outlets should target 6 to 8% for healthy operations.

Investors who get approved usually submit location feasibility data, competitor mapping, and conservative revenue projections. This shows the bank that the business is planned, not speculative.

Reason 3: Poorly Prepared Project Report

A generic project report is one of the fastest ways to get rejected.

Banks see hundreds of franchise proposals every month. Template-based reports with inflated revenue numbers are instantly flagged. Most franchise loans in India fail at this stage because the projections lack grounding.

Common mistakes include:

• Unrealistic break-even timelines (claiming profitability in 3 to 6 months)
• Ignoring local rental pressure
• Underestimating working capital needs (experts recommend 3 to 6 months of operating expenses)
• Copy-paste financials across cities

Banks look for logic, not optimism. A slower, believable growth curve is preferred over aggressive projections. Serious investors work with customized financial models that reflect local costs, phased ramp-up, and margin sensitivity. This increases credibility.

Reason 4: Inadequate Promoter Contribution

Banks expect promoters to contribute a meaningful share of the total investment. When applicants expect 80 to 90 percent funding, rejection becomes likely.

Most banks prefer:

• 30 to 40 percent promoter contribution
• Clearly traceable source of funds
• Capital invested before loan disbursement

If the promoter contribution is unclear, borrowed, or undocumented, the loan file weakens immediately. Successful applicants for franchise loans in India usually invest upfront in deposits, interiors, or franchise fees. This signals commitment and reduces perceived risk.

Reason 5: No Business or Sector Experience

First-time entrepreneurs are not automatically rejected, but experience matters.

Banks evaluate whether the applicant understands:

• Day-to-day operations
• Cost control
• Staff management
• Compliance requirements

A complete lack of exposure raises concerns about execution risk. Investors who get approved often strengthen their profile by:

• Adding a co-promoter with experience
• Showing prior retail, sales, or operations exposure
• Demonstrating training commitments from the franchisor

This reassures lenders that the business will be professionally managed.

Reason 6: Misunderstanding Collateral-Free Loans

Many applicants believe CGTMSE-backed loans are automatic. They are not.

While CGTMSE reduces collateral requirements, banks still perform strict credit evaluation. The scheme now offers coverage up to ₹10 crore as of 2025, with guarantee coverage ranging from 75% to 85% of defaulted principal amounts depending on the borrower category.

Approval depends on:

• Promoter creditworthiness
• Business viability
• Debt servicing capacity

Collateral-free does not mean risk-free for the bank. Most rejected applications under CGTMSE fail because the business model does not demonstrate predictable cash flow. Successful applicants treat CGTMSE as a support mechanism, not a shortcut.

Reason 7: Location and Rental Mismatch

Rent is one of the biggest silent killers of franchise profitability.

Banks closely monitor rent-to-revenue ratios. If projected rent exceeds sustainable limits, the loan is declined even if everything else looks strong. Industry experts recommend keeping rent costs under 10% of total revenue for most small businesses. Retail outlets should aim even lower, between 5 to 10%.

Typical red flags include:

• Premium locations with unproven footfall
• Long lock-in periods with high escalation
• Lease agreements signed before loan approval

Smart investors finalize locations only after bank feedback or keep lease agreements conditional. This flexibility improves loan outcomes.

Table showing industry-standard rent-to-revenue benchmarks

How Investors Actually Get Franchise Loans Approved

Understanding rejection reasons is only half the equation. The other half is learning how approvals really happen. Approved investors typically follow a structured approach.

Step 1: Financial Hygiene Before Application

They prepare 6 to 9 months in advance. Credit scores are optimized, liabilities reduced, and income stability demonstrated. Maintain credit usage at 30-40% of available limits and ensure all outstanding dues are settled.

Step 2: Conservative Business Planning

They submit realistic projections with slower ramp-up assumptions and clear working capital buffers. Break-even timelines are set at 12 to 18 months rather than 3 to 6 months.

Step 3: Clear Capital Structure

They invest their own funds upfront and maintain transparency around sources. Typically, 30 to 40% of total project cost comes from promoter contribution, with proper documentation.

Step 4: Bank-Aligned Documentation

They align proposals with the bank's risk framework, not marketing brochures. Project reports include local market analysis, competitor assessment, and sensitivity analysis.

Step 5: Right Lending Partner

They approach banks and NBFCs familiar with franchise loans in India, not generic loan desks. Different lenders have different appetites for franchise financing.

This systematic approach works better than guesswork.

Banks vs NBFCs: Choosing the Right Route

Banks offer lower interest rates but stricter scrutiny. Presently, financial institutions levy annual interest rates on commercial loans ranging from 10.6% to 26%, with the specific rate varying based on the applicant's credit profile and loan type. NBFCs offer flexibility but higher costs.

Experienced investors often:

• Use banks for long-term capex loans
• Use NBFCs for faster working capital
• Blend funding sources strategically

The goal is not just approval, but sustainable repayment. With digital lending platforms growing rapidly, fintech players like LendingKart and Razorpay Capital now offer instant approval with AI-based underwriting, making them viable alternatives for franchise financing.

The Role of the Franchisor in Loan Approval

Contrary to popular belief, franchisors do not guarantee financing. However, strong franchisors help indirectly by providing:

• Outlet performance benchmarks
• Training certifications
• Standardized cost structures
• Banker references

Investors who leverage franchisor data responsibly improve approval credibility. Some franchisors maintain relationships with specific banks or NBFCs, which can streamline the application process.

Government Schemes Supporting Franchise Loans

The Indian government offers several schemes that support franchise financing:

MUDRA Loans (PMMY): Provides loans up to ₹10 lakh for micro-enterprises with minimal documentation.

Stand-Up India Scheme: Offers loans between ₹10 lakh to ₹1 crore for SC/ST and women entrepreneurs, particularly beneficial for franchise startups.

PMEGP: Provides subsidy-based loans for new manufacturing and service units, including franchises.

These government-backed programs, combined with CGTMSE coverage, have made franchise financing more accessible in 2025 and 2026 compared to previous years.

Why Rejections Are Not the End of the Road

A rejected loan application is not a rejection of the business idea. It is feedback on structure.

Many investors who eventually succeed get rejected once or twice before approval. They use the feedback to refine projections, adjust funding mix, or rework locations. In the ecosystem of franchise loans in India, persistence paired with preparation wins.

Key takeaways after rejection:

• Review and improve credit score
• Reduce existing debt burden
• Strengthen project report with local data
• Increase promoter contribution
• Consider alternative lenders (NBFCs, fintech platforms)
• Seek franchisor support for documentation

Current Trends in Franchise Financing (2025 and 2026)

The franchise financing landscape is changing:

Digital Lending Growth: Fintech platforms are rapidly gaining market share, with projections showing that nearly two-thirds of new business and personal loans could come from digital channels by 2026. Fintech platforms offer faster approvals and alternative credit assessment methods.

Revenue-Based Financing: Some investors now explore revenue-based financing options where repayment is linked to actual business performance rather than fixed EMIs.

Crowdfunding: Platforms like Tyke and Seedrs are enabling franchise investors to raise startup capital from micro-investors and local supporters.

Lower Interest Rates: Business loan rates have become more competitive in 2025. Fresh borrowers are getting loans at rates approximately 0.73% lower than before, and those with existing loans saw their rates decrease by around 0.61%. This makes franchise financing more affordable than before.

Final Thoughts

Franchise loan rejection is not about luck. It is about alignment.

Banks want clarity, discipline, and predictability. Investors who understand this build credible loan cases instead of looking for shortcuts.

If you are planning to invest in a franchise, treat financing as a strategic exercise, not a formality. Clean financials, realistic planning, and patience matter more than brand hype.

When approached correctly, securing franchise financing is not impossibly difficult. It simply demands seriousness, structure, and respect for risk. The approval rate improves when investors demonstrate financial discipline, business acumen, and genuine commitment to the venture.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.