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If you are seeking franchise business financing, some things may surprise you as a first-time franchisee. Since franchisors require an initial investment to secure their rights, the initial, up-front pricing may be a challenge to secure.
It is true that certain types of business actually can get free or low-cost start-up funds. Grants might be available, though unlikely, and the Small Business Administration coordinates with pre-approved lenders to assist businesses with the initial funding of new, small businesses.
Unfortunately, even with SBA assistance, and sometimes because of SBA involvement, business loans can take a toll on fresh-faced and excited entrepreneurs. Any lender will expect sacrifices from you, so prepare yourself for some intrusive requests. Evaluate your tolerance levels for each as you ink your first start-up loan. One way or another, you will be expected to accept some or all of these requirements.
Financial Strength
A bank expects you to pay them back, so you have to prove that you are a worthwhile risk to them. This means either cash reserves or evidence of prior success. Do you remember how, as a youth, you couldn’t get a job without experience, but you couldn’t get experience without a job? Well, welcome back. If you had the cash, you wouldn’t need the loan, and to get the loan, you need proof that you either have the cash or that you have successfully run a business before.
Eggs in Different Baskets
Lenders will also not expect the business to repay the loan. Yes, that’s your plan. Yes, that seems to make sense, but the lender wants the money back even if your business bombs. For you, this means that repayment must be available from another source like investments, cash, or a partner’s income. Don’t be surprised when the risk evaluation is not solely dependent on your anticipated, but as-yet-unproven, revenue.
Personal Guarantees
Corporate law allows many ways to protect your personal property from business failure. So, what will a lender do for untested entrepreneurs? They will get around that by requiring a personal guarantee that you (and your spouse in a community property state), will have to sign if you want the loan. A personal guarantee is just that: you are fully and wholly responsible for the loan, even if it takes years to pay off after you sell or close a business. Of course, your plan is positive, but the bank plans for the worst.
Liens
If cash, credit, and other income streams are not available, lenders will look for collateral by putting a lien on your real property. This could be a lien against your car, a boat, your house, or anything of value that gives them a security interest. This won’t disrupt those collateral items—you can still go boating on your days off. But, if you default on loan payments, a car, boat or house cannot be sold without first making good on the original franchise loan.
Don’t be dissuaded. Franchises work because franchisees are dedicated and utilize their new company’s resources to succeed. But, as you consider business loan financing, don’t be surprised at some demanding requests from lenders. If you prepare yourself for this step in the new franchise process, you can then plan for your new franchise success.