Franchise Financing Report
Items to Prepare Before You Seek Financing
Gaining the necessary financing for your franchise venture can be an overwhelming task, but preparing all of your documents in advance can help tremendously in expediting the process. Preparation is vital to lessen as many of the lender’s reservations as you can.
The following checklist will help you gather all of the information that lenders may require to complete your application.
- Personal Background: Educational and work history, proof of residence, identification
- Financial Statements: Personal and business bank statements for the past 12 months as well as income tax returns for the past three years
- Credit Report: Request a credit report from each of the three national credit-reporting bureaus before you send the loan request form so you can review them for accuracy
- Business Plan: All lending programs require a business plan, which usually covers the concept, and projected financial statements
- Collateral: Loan packages may or may not require collateral, which involves describing what will be used to secure the loan
- Loan Information: Specify the requested loan amount, the type of loan, how the loan will be used, and asset amounts you currently have
- Legal Documents: Lenders may require additional documents, including franchise agreements, business license/registration, commercial lease, articles of incorporation, etc.
Your credit report and business plan are extremely important to acquire funding, which are explored further below.
Obtaining funding of any kind begins with your personal financial health and financial health is commonly gauged with a credit report. Credit reports track purchasing and payment history, along with job and residency history. There are three national credit-reporting bureaus—Equifax, Experian and TransUnion—all of which independently gather credit information.
Credit reports from all three bureaus can be obtained through AnnualCreditReport.com, a secure government website that provides streamlined access to free annual credit reports. To ensure accuracy on all reports held with the three independent credit bureaus, it is necessary to request a report from each bureau. To correct or update information on any report, which is important to maintain the integrity of your credit reputation, contact the appropriate bureau(s) through the contact information given on their respective website(s).
When deciding whether to approve credit for an applicant, lenders often consider the following:
- Length of credit history, with longer credit histories regarded favorably, along with timely payments
- Number of credit accounts open and number holding a balance, with fewer credit accounts holding a balance regarded favorably
- Payment history, with emphasis on timeliness
- Collection agency involvement
- Bankruptcy declarations
- Outstanding debts compared to credit limits, with higher credit limits and lower debts regarded favorably
- Number of recent credit applications, with fewer regarded favorably
Credit report requests also come with the opportunity to purchase your credit score. Your credit score is a numerical representation of your financial strength, providing lenders a guide to a borrower’s risk level. The higher the score, the better your credit is in the eyes of lenders and the lower the risk of extending a loan to you.
All three credit bureaus offer their own separate score based on the particular information held by that bureau about your credit history. Lenders often review all three scores, or scores from particular bureaus only, to make their final decision. Overall, the credit score commonly given the most weight in lending is the FICO score.
FICO Scores are provided by the Fair Isaac Corporation, and range numerically from 300 to 850. Elements used to determine the score are:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
Again, since your FICO score is based upon what is contained in your credit report from each of the three credit bureaus, ensuring that each credit bureau has accurate information about your credit history is essential.
Creating your business plan is one of the most important actions in securing financing for your franchise. Both potential lenders and you as the business operator benefit from a detailed business plan before securing the deal. A completed business plan will contain the following:
- Business concept
- Business objectives
- Product/service description
- Professional background of investors
- Market of product/service
- Marketing plan
- Operational elements
- Additional information
Many franchisors provide a working business plan outline for franchisees to use, so check with your respective franchisor first. Nonetheless, much of the needed information can be found in the FDD supplied to you by the franchisor. Some franchisors will even disclose potential earnings figures based on historical results from franchisees in the system to use in their business plan. Many though will not provide data on future potential earnings to mitigate potential complaints if those projections are unachieved.
Franchise Direct offers an online guide for creating a business plan for your franchise. The Small Business Administration (SBA) also provides a step-by-step guide and resources to develop a winning business plan, including videos, templates, samples, tutorials and training.
Lenders strive to take on as little risk as possible by reviewing detailed information contained in credit reports and business plans. They aim to award loans to businesspeople that have shown solid personal and business financial responsibility, have delivered a thorough business plan, and those who are committed to making a success of their businesses.