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Franchise Financing – The First Steps

Franchise Financing – The First Steps-1

Most prospective franchisees must borrow money in order to purchase and start up a franchise operation.But today’s lending environment is tough. With so many lenders affected by the mortgage default debacle now dragging down the US economy, lenders are tightening up on loan approvals.

In order to get a lender to consider a request for a loan, there are two things you must have:  a good credit rating, and a sound business plan. Without these in hand, it is impossible to obtain financing.

Franchise Financing – The First Steps-1First, start with your credit rating. The Fair and Accurate Credit Transactions Act (FACTA), entitles all consumers to receive one free credit report each year. You can obtain your free report from the Annual Credit Report government approved web site.

There are options there for receiving the report online or through the mail. Basically, there are three main Consumer Reporting Agencies (CRAs): Experian, TransUnion, and Equifax, and links to these can be found at the annual credit report site.

If your credit is good then great! If however, you think the credit report is wrong, you do have options to correct it. The FCRA stipulates that both the consumer and reporting agency are responsible for correcting inaccurate or missing information. You must notify the CRA in writing about the information that is inaccurate. The CRA must investigate this information and report back to the consumer. If the information is found to be inaccurate, it must be corrected and other CRAs supplied with the correct information. You are also allowed to inform any potential lender that there is a dispute regarding your credit report. If you require more information you can visit the Federal Trade Commission website which provides relevant information relating to credit reports and FAQ.

If it all sounds like too much paperwork, don’t despair. Though there are legitimate credit improvement services there that handle the dispute. Check out your local phone book or the web. Your best bet is to work with your own lawyer if you need help disputing your credit report.

Once you’ve established a good credit report and this can be simple to do, the next step is writing a business plan. Without a business plan, there is little hope of obtaining any financing.

Much of the information you need to create your business plan – such as operational processes, start-up costs and fees, products and services, marketing strategies and more -- should be found in the Universal Franchise Offering Circular/ Franchise Disclosure Document (UFOC/ FDD) supplied by the franchisor company. Some franchisors even supply a business plan template for you to use.

Creating a business plan does require some detailed research and good writing, but it does not have to be an insurmountable difficulty. Most business plans follow a uniform format, and you can find samples of these in books and at web sites. There is a wealth of resources available for you to view at The Business Plan Center including samples plans, plus links to business consultants, business plan software, books and much more.

Basically, all business plans start with an executive summary which describes the franchise, the products and services offered, the target market, the competition, your competitive advantage, and projected revenues and return on investment. Since this is your initial pitch, it should be persuasive as well as concise, probably limited to one page in length.

The core of your business plan then must cover some specific details:

  • A business Mission Statement
  • business structure of the franchisor company regarding management, history, debt, earnings etc.Franchise Financing – The First Steps-2
  • Industry analysis of the sector, be it pizza restaurants or window installation that describes the market share, competition, future growth, and trends in the industry.
  • Operational systems for the business, this information can be found in the UFOC/ FDD.
  • The marketing plan for your business. Again, the UFOC/ FDD should provide information on what the franchisor provides for marketing support, plus you'll want to add some of your own original strategies to differentiate your business.
  • Business management plan for your company, how are you going to run it on a daily basis? Include your own management experience; and the management structure you intend to put in place.
  • Financial information to show how you intend to finance start-up costs (this can include your pursuit of a loan). You need to supply projected earnings forecasts and cost analyses, with a target date to break even on your investment.
  • An appendix of additional documents, such as your tax returns, media coverage of the franchise, and any other materials that will support your proposition to buy and profitably operate a franchise.


The franchisor you are working with will probably review your plan before you present it, and can give you good advice on how to improve it. It is imperative though that your own lawyer and accountant review the plan too. You can get more information about writing a business plan here at Franchise Direct's Guide to Buying a Franchise.

With a good credit report and sound business plan in hand, you will be ready to approach lenders and apply for a loan.


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