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Franchise Financing –What You Need to Know to Win a Loan

After you’ve gone through all the hurdles of finding the right franchise and getting approval from the franchisor for your proposed business, there is still one more obstacle looming ahead – funding the franchise start-up. You will have to win over a bank manager or loan officer, and to do that you need two essentials: A sound, organized business plan; and a well-rehearsed presentation.

 

If you’ve gotten this far in buying a franchise, then you must already have a business plan written. The business plan is the basic blueprint for how your franchise business will operate. Some franchisors offer help with creating the business plan, though there are legal limitations on what a franchisor can claim about projected earnings. You and your accountant will have to calculate projected earnings based on expenses and projected sales.

 

Most business plans begin with an executive summary that describes the franchise, the products and services offered, the target market, the competition, your competitive advantage, and projected revenues and return on investment. This is the initial pitch that the loan officer will see. It should be detailed and persuasive, and probably not exceed one page in length. Remember that old adage about first impressions being lasting ones, and make sure the executive summary offers an accurate, enthusiastic, and positive portrait of your proposed business. Franchise funding could hinge on this one page. The loan officer has to like what it says to read more and ultimately agree to a franchise loan.

 

What else will the loan officer want to know? The profit and loss forecast as well as the cash flow analysis are critical to financing. Basically, you must detail your expected profit/loss for the first year, and when you expect to break even on your investment. The banker will want to know how you intend to finance the portion of the business not covered by your potential loan. Are you investing your own savings? What are your other sources for financing beyond the bank loan? Bankers look favorably on those who are willing to put their own assets at risk to finance the business. You must explain how much money you will need to take out of the business to support yourself and family during the first year. All these numbers must be worked out ahead of time with your accountant, and backed by solid data.

 

The rest of the business plan will describe your market and competition, the business management structure, and operational procedures. For more information on putting together a professional business plan for a franchise, see Guide to Buying a Franchise.

 

Now, the painful part. Pitching yourself to bank is like giving a speech. And for it to go over well, you must rehearse, rehearse and rehearse some more. You will have to convey that you know and understand the terms and numbers mentioned above. Practicing your pitch will help you be more relaxed, appear more confident, project enthusiasm and a positive attitude. The bank is not just financing a business; it is financing you. Your manner, appearance, knowledge and clarity about your proposal must be convincing. Some simple things you can do to achieve that: arrive on time, dress neatly, and make eye contact.

 

Before the interview, be prepared with your specific objectives and supporting arguments. Know the loan amount you need; a specific interest rate and expected time to pay back the loan; what costs you can cover in setting up the loan; and what security you can offer. Be ready to ‘sell yourself” by describing any past experience relevant to the proposed business – even if it was working the cash register at a fast food franchise – and emphasize any past business management experience.

 

The good news about finding franchise funding is that you are presenting a proven system rather than a “go it alone” type of new business. Banks are more inclined to go with established, successful name brands. Some banks even have their own franchise loan units, and prospective franchisees can often obtain loans that cover 70 percent of their start-up costs.

 

If you approach the bank with a good business plan in hand, and can verbally make a clear case as to why and how your franchise will succeed, your chances are good for getting the franchise loan.

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