Items to Prepare Before You Seek Financing

Items to Prepare Before You Seek Financing

Before Contacting a Lender

Before contacting any lender, it’s important to thoroughly prepare yourself so you can present yourself as a competent businessperson to allay as many of their reservations as you can. Two important items in this preparation are your credit report and a business plan.

Credit Reports

Obtaining funding for anything, not just a franchise, begins with your personal financial health. Financial health is gauged with a credit report. Credit reports mainly track a consumer’s purchasing and payment history along with their job history and residency history. There are actually three national credit-reporting bureaus: Equifax, Experian and TransUnion, which independently gather credit information for consumers. Credit reports from all three bureaus can be obtained through AnnualCreditReport.com, a secure government website that provides a streamlined way of getting your credit reports quickly and for free once a year. It isn’t necessary to request a report from each bureau, but because the bureaus work independently, they sometimes have differences in their reports. If this is the case, or there is incorrect information on any of the reports, contact the appropriate bureau(s) through the contact information given on their respective website(s) and have it corrected.

When deciding whether to approve credit, lenders take the following into consideration:

• Your payment history – whether you pay bills on time consistently.
• Have you ever had a bill referred to a collection agency?
• Have you ever declared bankruptcy?
• How much debt do you have outstanding compared to your credit limits? The closer your debt is to your credit limit, the less favorable for loan approval you become.
• How long is your credit history? If you don’t have much of a credit history, prompt payments are even more important.
• Have you applied for more credit lately? Too many applications for credit has a negative impact on your chances for approval.
• Number of credit accounts do you have. Too many is considered a negative.

When you request your credit report, you will also be given an opportunity to purchase your credit score. Your credit score is a numerical representation of your financial strength, similar to a letter grade given for school assignments. The higher the score, the better your credit is in the eyes of lenders.

There are several versions of your credit score. Experian and TransUnion offer their own score, but the most common used one is the FICO score – and even FICO scores have several variations based upon what is contained in the credit report of each of the three credit bureaus. Many lenders believe that based solely upon credit report data, FICO scores provide the best guide to a borrower’s future loan risk. Lenders typically get all three scores and use the middle one in their decision-making process.

FICO Scores range up to 850. Elements used to determine the score are:

• Debt to income ratio
• Debt to equity ratio
• Responsible use of unsecured credit
• Low recent credit inquiry activity
• Home ownership
• Collateral on hand

*Provided by Heather McPherson, Senior Financial Advisor at FranFund

Business Plan

Creating the business plan is without much argument the most important action in the starting of any business. It provides potential lenders, not to mention the business owner, a critical and detailed look at the business elements before jumping in. The business plan will contain the following:

• Business concept
• Business objectives
• Legal status of business
• Product/service description
• Personnel background
• Market of product/service
• Marketing plan
• Operation elements
• Premises/location
• Financials
• Additional information

Several franchisors provide a business plan outline for you to use, so check with them first. In addition, much of the information needed can be found in the FDD supplied to you. Some franchisors will even disclose potential earnings figures based on historical results from franchisees in the system, however, some will not provide data on future potential earnings because of potential complaints that franchisees might lodge if they don’t achieve those projections.

The Small Business Administration (SBA) Small Business Planner provides a step-by-step guide and resources in developing a business plan such as videos, templates, samples, tutorials and training. Also, check out the Franchise Funding and the Business Plan section of Franchise Direct’s online Guide to Buying a Franchise for more information on preparing a business plan.

With every loan, lenders take a risk, but by asking for all of this detailed information contained in the credit report and business plan, lenders strive to take on as little risk as possible. They look for businesses that show promise awarding loans to businesspeople that have shown solid personal and business financial responsibility, and are committed to the success of their businesses.

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