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Yay! You know the franchise you want and are partnering with a franchisor. Every step along the way is new and exciting as you work toward hanging your sign. As you move forward, you will receive coaching and guidance from your franchisor on the operation, but most of the financial issues are based on individual financial status. Are you ready for a business loan approval?
Financial readiness for a business is an education all its own. Most buyers don’t have enough cash to operate for a couple of years while covering all living expenses. And while you might have access to less traditional funds, most franchise buyers also need to arrange traditional financing. Having the support of readily available loans helps keep the business afloat in the early months, but it is a bit scary to approach, even if you have sought loans in the past.
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My first job out of college was as a financial analyst for a large, global lender. From there, I moved into mortgage banking. And yet, when I bought my first home, I was a nervous wreck—qualifying and winning a lender's approval was intimidating, and then signing a one-inch-high stack of documents was downright frightening. A few years later, purchasing a mailing and shipping franchise was no less terrifying. Our hopes and plans are often dependent upon the lender’s positive view of our abilities, plans and creditworthiness, but you can prepare well if you know what lenders want.
New franchisees seeking loans should ready their financial picture accordingly in the months leading up to franchisor approval. Traditional lenders (and SBA lenders) will evaluate your worthiness, and they are doing it with no operational history—no proof that you can or will be successful. It is truly risky for them, too, but you will be ready for their scrutiny with a few key components:
- A good credit score. My father used to say that a good credit score was second only to your good name (and that a credit score proved the worth of your financial good name). Your credit score documents evidence that you have used credit successfully and diligently pay your bills. Strive for at least a score of 700 to be considered a viable borrower. Reduce your debts, pay on time, and maintain a good score.
- Completed recent taxes. What the government gets, the lender sees. At least two years of history should be enough, but have it scanned and ready to go.
- Some cash reserves. Those handing out money expect you to have some skin in the game. By using collateral (like your home) or putting cash aside, a lender will see a commitment to succeed.
- A real business plan. Lenders want your plan for success clearly outlined and reasonably presented. It will exemplify your experience or management capabilities or skills. Your realistic, anticipated timelines for profitability enable lenders to understand your future ability to repay any loan.
- Forecasts based on fact. A franchisor can provide statistics and information that will help decrease the lender’s risk. Success rates of other franchisees and the overall performance of multiple sites should show favorably (otherwise, you wouldn’t choose this franchise).
Obtaining a loan to open a franchise can certainly be daunting, even if you have all your ducks in a row. The process is rigorous and deserves your focus just as much as your franchise search. Your loan readiness is intertwined with your franchise’s early success and opening. With an organized package for lenders that highlights a solid financial base, you’ll be loan-ready and well-prepared to open your new franchise.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.