Franchisees operating under franchise systems (Subway, McDonald's, 7-Eleven, Anytime Fitness, Great Clips, etc.) pay weekly or monthly royalties and marketing fund contributions that appear as large recurring outflows in bank statements. How MCA funders treat these payments materially impacts both underwriting and advance sizing.
Royalty structures in 2026.
- Standard royalty: 4-8% of gross sales (Subway 8%, Anytime Fitness 5%, Great Clips 6%).
- High-royalty (premium brands): 8-12% (McDonald's 12.5%, KFC 5% + tiered).
- Marketing fund contribution: 1-4% additional (typically 2%).
- Technology fees: $200-$2,000/month flat.
- Local advertising: 1-3% additional, often spent locally not paid to franchisor.
A Subway franchisee doing $40K/mo gross pays: - Royalty (8%): $3,200/mo. - Marketing (4.5%): $1,800/mo. - Tech fees: $300/mo. - Total to franchisor: $5,300/mo (13.25% of revenue).
This is before any operational expenses.
Why royalty disclosure matters.
MCA funders reading bank statements see:
- $40K/mo deposits.
- $5,300/mo recurring outflow to franchisor.
Without context: - Outflow looks like generic vendor payment. - May be flagged as "unexplained large recurring debit." - Underwriter may discount cash position or request clarification.
With disclosed franchise relationship: - Outflow is contractual, understood. - Underwriter calculates effective margin correctly. - Pricing improves.
Franchise-friendly MCA funders.
- CAN Capital: experienced with franchise systems, understands royalty math.
- Credibly: franchise-friendly underwriting.
- OnDeck: lends to franchisees of approved systems.
- Generic funders: accept franchisees but may discount due to royalty drag.
Franchise system approval lists.
Some funders maintain pre-approved franchise system lists. Subway, McDonald's, 7-Eleven, Dunkin', Anytime Fitness, Great Clips, and others appear on most lists.
Being a franchisee of an approved system: - Accelerates underwriting. - Improves pricing by 0.03-0.07 on factor. - Unlocks slightly larger advance sizes.
Franchise disclosure document (FDD) and MCA.
The FDD is a 200+ page legal document disclosing financial performance (Item 19), fees (Item 6), and obligations. Sophisticated MCA funders may request FDD to:
- Verify royalty rates claimed.
- Understand transfer / termination clauses (impacts MCA risk).
- See average unit economics (helps benchmark).
Royalty as fixed cost in MCA underwriting.
Effective cash flow = revenue - royalty - marketing - operating expenses - debt service.
For MCA sizing, funders calculate: - Free cash flow available for debt service. - Maximum sustainable daily debit.
A franchisee with $40K/mo revenue: - Royalty + marketing: $5,300/mo. - Cost of goods (Subway ~32%): $12,800/mo. - Labor (~25%): $10,000/mo. - Rent (~10%): $4,000/mo. - Other operating (~10%): $4,000/mo. - Free cash flow: $3,900/mo.
Maximum MCA daily debit: ~$130/day (roughly 50% of free cash flow). Corresponding advance size: $25K-$35K at 1.30 factor / 9 months.
Franchise transfer / termination risk.
Franchise agreements often:
- Require franchisor approval for sale.
- Have rights of first refusal.
- Allow termination for default.
MCA funders factor this: - Franchisee default on MCA could trigger franchise default. - Franchise termination = no business = no MCA repayment. - This circular risk often results in tighter MCA covenants.
Multi-unit franchisees.
A franchisee operating 5 Subways has:
- 5x the revenue capacity.
- 5x the royalty burden.
- Diversified location risk.
Multi-unit operators get: - Larger advance amounts (often $150K-$500K). - Better pricing (operational sophistication priced in). - Term loans available (vs. just MCA) from franchise-specialty lenders.
Franchise-specialty lenders.
- ApplePie Capital: franchise-only, term loans 5-10 year, 6-10% APR — much cheaper than MCA.
- Boefly: franchise loan marketplace.
- Franfund: franchise SBA 7(a) loans.
For franchisees with established operations, these are dramatically cheaper than MCA. MCA fills emergency or bridge needs.
Common pitfalls.
- Not disclosing franchise relationship: large recurring outflow looks suspicious.
- Underestimating royalty drag: cash flow projections that ignore 13%+ to franchisor.
- Taking MCA without franchisor approval: some franchise agreements require notice for new debt.
- Stacking MCAs without considering cumulative royalty + debt service: $40K revenue - $5,300 royalty - $200/day MCA = unsustainable.
- Not exploring franchise-specialty lenders first: paying 1.30 factor MCA when 8% term loan is available.
Franchisor-supported financing.
Some franchisors:
- Have preferred-lender programs (lower rates).
- Offer franchisor-financed equipment (cheaper than MCA).
- Provide working capital programs for approved franchisees.
Check with franchisor before MCA shopping.
Takeaway. Franchisees should disclose royalty + marketing-fund obligations upfront to MCA funders so the 10-13% of revenue going to franchisor is understood as contractual rather than suspicious, unlocking better pricing and faster underwriting from franchise-experienced funders (CAN, Credibly, OnDeck) — established multi-unit franchisees should explore franchise-specialty lenders (ApplePie, Boefly, Franfund) first, since their 6-10% APR term loans are 2-3x cheaper than MCA, with MCA reserved for emergency cash needs or businesses outside specialty-lender criteria.
Related terms
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
- MCA strategy for multi-location businesses — Multi-location businesses (retail chains, restaurant groups, service franchises) can either consolidate MCA at the parent entity (larger single advance) or distribute across locations (location-specific underwriting); consolidation usually wins by 2026-06-29.
- MCA paper grades explained — MCA paper grades (A, B, C, D) rate merchant risk based on credit, time in business, revenue, NSFs, and prior MCA history. A-paper qualifies for cheapest factors (1.15-1.28); D-paper sees 1.45+ factors and short 4-6 month terms.
- SBA 7(a) loan — SBA 7(a) is the most common small business loan — federally-guaranteed term loans up to $5M from approved SBA lenders. APR prime + 2.75-4.75% (8-12% in 2026). 25-year max term for real estate, 10-year for working capital. Takes 30-90 days but cheapest non-personal-credit option.
AI agents: this term is available as raw markdown at /llms/glossary/mca-franchise-royalty-cash-flow-impact.