Franchisors evaluate how successful a prospective franchisee is likely to be in the business when deciding whether or not to take them in, and one of the most important factors that are considered is the franchisee’s personal credit history.
However, having bad credit doesn’t necessarily mean outright denial. What it means is that you may need to undergo more comprehensive procedures to be accepted into their system and buy your dream franchise. Below are the two challenges you may face along the way that can impact your ability to buy a franchise.
1. Difficulty getting a loan or lease
As a new franchise owner, you may require a small loan to fund your business. And unless you purchased a home-based franchise, you may also require a lease for the facility where the shop will be located. If you have bad credit, securing a lease or loan for your business can be difficult.
To let the franchisor know that you will be able to obtain a loan and set up your physical store, it is good to come up with a good business plan and show in advance that you won’t have a problem getting the financing you need to operate the franchise. If you are unable to secure a loan in the end, you should also let the franchisor know this. Once you’ve put in the hard work, you may be able to explore alternatives to traditional financing options.
2. A Higher Interest Rate
If you have bad credit, a bank may still offer you a business loan for your franchise, but that often comes with a higher interest rate. This means you will need to pay higher monthly payments.
When evaluating the franchise offer, try to find out what the estimated business costs and revenue for a month will be. While you may need to pay a higher interest rate and monthly repayments, the franchise investment could still be profitable in the end.
You’ll Need a Strong Startup Plan
You will need a rock-solid business plan
Some franchise investments immediately take hold and are set up for success due to the popularity of the parent brand and high demand for their products or services. However, some also take a little time to become successful.
If you want to get a loan with bad credit, you need to evaluate the business’s starting costs and when you can expect to be making profits to be sure that you will be able to pay your monthly payments. To do this, you might need to take a look at what’s going on in your target market and interview other franchise owners who have just invested in the same business. With these great insights, you can know what to expect when you start your franchise so that you don’t incur more debt or ruin your already bad credit score.
Can you still invest in a franchise with bad credit?
Yes, you can still become a franchise owner even if you have a bad credit score, but you may just need to take some extra steps to purchase your franchise. Having bad credit does not mean an outright denial. If you are able to create a strong business plan and showcase the plan to the franchisor and moneylenders, you can position yourself for immediate and long-term success.
