Hurray! Your dream of owning a franchise is about to become a reality. You have chosen the franchise to invest in and started working on a partnership with your potential franchisor. Each step of the process is new and interesting as you move closer toward placing the brand sign in front of your store. As you proceed, the franchisor will guide and educate you on how to run the business, but the majority of the financial issues that may arise will depend on your financial health. So the question is: are you ready for loan approval?
Being financially ready for a franchise is an education in itself. Not everyone looking to own a franchise have the money to run it for several years while paying their living expenses. Although you may have access to less traditional funds, many prospective franchisees also have to get a loan or line of credit from moneylenders or financial institutions. Having access to readily available loans can help you keep the business running in the first few months, but applying for a loan can be frightening, even if you are not a first-time borrower.
When you are seeking a business loan, your plans and hopes rely on what the lender thinks of your capabilities, plans, and creditworthiness. However, there are ways you can prepare for a loan application if you know what the moneylenders are looking for.
Prospective franchisees looking for a loan need to work on their finances way before they are approved by a franchisor. Banks and SBA lenders will assess your abilities to repay debts, as they are giving out the loan with no operational history – there is no evidence that you will or can succeed in your business. They are also taking a risk, so you should be prepared for their questions and scrutiny regarding some important components of your financials.
- A good credit score. The only thing more valuable than a good credit score is a good name (and your credit score shows what your financial good name is worth). By reviewing your credit score documents, lenders can see proof that you have used your credit wisely and offset your bills on time. To be seen as a viable borrower, try to aim for at least a credit score of 700. Make a dent in your debts, pay when due, and keep a good credit score.
- Completed recent taxes. Lenders will also want to see the taxes you pay to the government. You should be okay with at least two years of tax history, but just make sure it is scanned and ready to be submitted.
- Cash reserves. The lender who wants to give you a business loan will want to ensure that you also contribute. By putting down key assets (i.e., your house) as collateral or having some money saved up, lenders will see that you are committed to the business and want it to succeed.
- A solid business plan. Another document that lenders want to see is your business plan. They want it to be comprehensive and well-presented. Your business plan will showcase your experience, skills, and abilities to manage the start-up. You also need to include realistic timelines for when you expect the business to be profitable, so lenders can know if you will be able to pay back the loan when the time comes.
- Fact-based forecasts. Your franchisor can provide some stats and data that will reduce the risk on the lender side. The success rates of other franchise owners and the performance of several branches of the business should be encouraging (if not, don’t choose that franchise).
Securing a loan for a franchise business can seem difficult, even if you are well-prepared. Apart from being rigorous and thorough, the loan application process also requires a lot of focus. Your loan readiness will depend on the early success and opening of your franchise. You are ready for a loan and prepared to start your new franchisee when you have a well-organized package indicating a strong financial base to present to lenders.
