What does the Federal Reserve Rate Increase Mean for the Franchise Market?

The Federal Reserve’s September 16, 2026 decision to raise rates by 0.25 percentage point is meaningful for small businesses and franchising, although I would characterize the immediate effect as a headwind rather than a major disruption. The Fed raised its target federal-funds range to 3.75%–4.00%, its first increase since 2023, citing inflation that remains elevated.

What the rate increase means for small businesses

The most direct impact is higher borrowing costs. Fed policy influences short-term market rates, which flow through to business loans, lines of credit and other financing. This is particularly important for SBA 7(a) financing because SBA variable-rate maximums are tied to a base rate such as prime. The SBA confirms that variable 7(a) maximum rates are calculated as the base rate plus a permitted spread depending on loan size.

For a business borrowing $500,000, even a quarter-point increase matters. On a 10-year fully amortizing loan, moving from 9.75% to 10.00%, for example, increases the payment by roughly $70 per month and about $8,400 over ten years. On a $1 million acquisition or franchise project, the impact roughly doubles.  This however is not a overly significant change for most businesses.

The bigger issue, however, isn’t necessarily this single 25-basis-point increase. It’s the possibility that rates remain elevated longer than business owners previously expected. The Fed’s September projections show a median projected federal-funds rate of 4.1% at the end of both 2026 and 2027, compared with a June projection of 3.8% for 2026 and 3.6% for 2027. That suggests policymakers now envision a higher-rate environment lasting longer than they did just three months ago, although those projections are not commitments.

What this means specifically for franchising:

We see five major effects on the franchise market.

1. Franchise buyers become more sensitive to the total investment. A candidate looking at a $300,000 franchise investment doesn’t just evaluate the franchise fee anymore. They are evaluating the monthly debt service on perhaps $200,000–$250,000 of financing. Higher rates make that monthly obligation larger and therefore put greater pressure on projected cash flow.

2. SBA-dependent franchise concepts will feel it more. This matters because SBA financing is an important funding source for franchise acquisitions and new-unit development. The SBA maintains a franchise directory specifically to help lenders determine the eligibility of businesses operating under franchise agreements. Concepts requiring $500,000–$2 million in startup capital will generally be more rate-sensitive than lower-investment home-based or service concepts.

3. Franchisee qualification becomes more important. Banks can respond to tighter financial conditions by focusing more heavily on borrower liquidity, collateral, credit quality, experience and projected debt-service coverage. That means franchisors should expect some otherwise interested candidates to have difficulty obtaining financing.

4. Existing franchisees may delay second and third units. Multi-unit operators frequently finance buildouts, equipment and real estate. If the economics of the second location were marginal at the previous interest rate, higher debt service can cause the franchisee to postpone development.

5. Lower-investment franchise models can become relatively more attractive. Service franchises, mobile businesses, home-based models and concepts with lower buildout requirements may have an advantage when financing is expensive because buyers need less borrowed capital.

There’s another side to this story

We would not interpret yesterday’s increase as signaling that the franchise market is headed for a major contraction.

The Fed simultaneously described economic activity as expanding at a solid pace, domestic spending as resilient, productivity growth as strong and capital investment as robust.

Its September economic projections are also relatively constructive. The median Fed participant projects 2.3% real GDP growth for 2026 and 2.4% for 2027, with unemployment around 4.1% in both years. The principal problem the Fed is addressing is inflation: median PCE inflation is projected at 3.7% for 2026, before declining toward 2% in subsequent years.

That distinction matters.

A rate increase occurring alongside economic growth is different for franchising than a rate increase accompanied by collapsing consumer demand and rapidly increasing unemployment.  We are seeing economic growth along with the rate increase, which is a big difference.

What I would tell franchisors right now

This environment puts an even greater premium on unit economics.

Franchisors selling $500,000–$1 million concepts need to be able to demonstrate why the investment makes economic sense when capital is becoming more expensive. That means having credible Item 19 financial performance representations where appropriate, realistic Item 7 investment estimates, strong lender relationships, reasonable buildout costs and a well-developed franchisee financing strategy.

We would also encourage franchisors to model franchisee economics at multiple interest rates.

For example, don’t simply ask:

Ask:

That stress test is increasingly important.

An interesting potential benefit for franchising

There’s also a counterintuitive argument that an uncertain economic environment can create more prospective franchise buyers.

Corporate restructuring, slower hiring, dissatisfaction with employment and layoffs can push experienced managers and executives toward business ownership. Franchising gives those individuals a way to enter entrepreneurship with an established operating model rather than building a business completely from scratch.

So higher rates can simultaneously make financing franchises harder while increasing interest in business ownership.

Our view of the franchise market after this rate increase

I would expect the effect to vary significantly by investment level:

The important point for franchisors is that the cost of capital has become a larger part of the franchise sales equation.

A franchise salesperson can no longer focus exclusively on franchise fees, royalties, training and territory. Increasingly, the conversation needs to include:

Total Investment, the Amount Financed, Interest Rate, Monthly Debt Service factored into Unit-Level Cash Flow and how this all impacts the Return on Invested Capital.

That’s ultimately where we think yesterday’s Fed decision matters most for franchising. The 25-basis-point increase itself isn’t enormous. The larger issue is that the Fed’s latest projections suggest the industry may need to operate with relatively expensive capital for longer than many franchisors and franchise buyers had anticipated.

This as an opportunity to emphasize lower startup costs, strong unit economics, SBA/lender relationships, financing programs and realistic Item 19 performance data. Brands that can demonstrate compelling economics despite a higher cost of capital should be better positioned to compete for qualified franchise buyers.

Chris Conner

President

Franchise Marketing Systems

For more information on how to structure your business for franchising, contact Franchise Marketing Systems:  www.FMSFranchise.com