Bad credit can pose a problem when looking to buy a franchise, but it should not discourage you from pursuing your dream of owning a business. Here’s our response to one of the clients at FranVue who want to know whether his poor credit history will lower his odds of getting a good franchise.
Q: I want to buy a franchise, but I filed for bankruptcy about nine years ago during my divorce. Will this stop me from getting approved for a good franchise, and should I reveal this to the franchisor since that happened more than eight years ago?
A: Thanks for reaching out to us at FranVue. Franchisors are basically looking for people who will be able to run their businesses successfully. They take many factors into consideration before deciding whether or not to accept a franchise candidate, and you can be sure that your personal financial history is one of the things that will be considered.
Bear this in mind as you investigate franchise opportunities: The reason franchisors ask these questions is to make sure that you succeed in the business. They are not looking for a way to reject you. They just want to be sure that you have what it takes to be successful with their system.
Credit history is an important factor that franchisors consider. They do this not only because you will be having a financial relationship with them but also because of the vendors you will be buying from. Below are some examples of when credit history is crucial.
- If you want to obtain a loan to open your business or you want to get lines of credit to finance your business operation. No matter whether you are seeking an SBA or traditional funding, your potential lender will want to see your credit report. If the franchisor discovers that you have an issue that will not allow you to get the necessary funding, they are going to tell you this straight away.
- If you need to get a lease for space to operate the business. You will probably be required to sign a personal guarantee to obtain a lease, and the property owner will conduct a credit report on you before accepting your guarantee. So, if you have bad credit, you may be unable to get a site for your business.
- If you want to partake in trade credit programs with suppliers and vendors of the franchise company. A lot of franchisees rely on terms from these vendors to manage their cash flow, so if your bad credit may prevent you from getting approved by the vendor, you may be unable to achieve success in the business.
From the examples provided above, you can see that your bad credit history can cause several challenges that will impact your chances of succeeding in the business. That’s the reason franchise companies ask for this information. With that being said, an issue with your past credit history is not too big a problem to overcome.
Two things that will determine how big your credit problems are: (i) how many times have you had credit issues? and (ii) how long ago did these issues happen?
If your credit issues are small, very few, and occurred a long time ago (i.e., five or more years ago), you will probably not face any problems at all, especially if you have maintained a good credit history many years since you experienced those issues. But if your credit problems are bigger, many in number, and occurred recently, you may face many challenges.
No matter what the case may be, it’s important to reveal this kind of information to the franchisor when asked. Even if you don’t, a good franchisor will surely find out since they will get credit reports on you before accepting your franchise application. If they realize that you lied or gave misleading information about your credit history, they will reject you immediately. Therefore, you need to be honest about this.
A lot of people have been through a period in their lives where things go bad for them, causing their credit standing to take a hit. It might be a job loss, divorce, etc. They resolve the issue and go on with their life, resetting a track record of good money management.
Both franchisors and vendors know this. In your case, although applying for bankruptcy is a sign of a big credit issue, it occurred many years ago, and you have an understandable reason for why the problem happened. Provided you have maintained a good credit history since then, you may be able to work out this issue with most franchisors.
