Question: I’ve found the franchise I want but I don’t have enough cash to completely fund the start up of the business so I’m going to need to get a loan. I’m just starting to talk to banks and they seem to want a number of things I don’t have, like a complete business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles or what should I do?
Answer: This is an often-asked question by those looking to join franchising as a franchisee. The best source of information about the options that might be available to you is the franchisor you are interested in joining. They should be familiar with the costs associated with each option and the likelihood of you obtaining financing from any particular source. It may also be helpful to understand the principals that underlie your ability to get financing, regardless of the lending source.
There’s an old adage formulated many years ago that’s still just as true today. There are four “C’s” involved in any decision to loan money to someone. They are Cash, Credit, Collateral and Character.
The fact is that it doesn’t matter whether you go to a bank, use the SBA guarantee service, or go to a friend or relative for the loan. The same basic rules will apply to any successful attempt to get credit. Here’s how the four C’s work:
Cash. One of the most common misconceptions people have is that they can borrow all of the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. Even given all of the other factors addressed below, you will almost certainly have to come up with cash out of your own assets equal to at least 25-30% of the total investment needed to start the business. Lenders like to make sure you personally have “skin in the game.”
Credit. Another thing that lenders insist on is a strong credit history. This means that they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well, you’ll find that you get almost no credit for that type of loan. Everyone realizes that most people will take care of their mortgage before their other bills, so what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn’t mean you’ll get a loan, a bad one almost guarantees that you won’t.
Collateral. Most lenders will require that you completely secure any loan you want with personal assets sufficient to provide for 100% recovery if you default on the loan. It doesn’t matter one bit whether your business is a corporation or any other type of entity, or whether you go through the SBA process – they are going to look to you for collateral.
Character. The final condition you must meet relates to your character or reputation. Frankly this is like your credit history – having great character won’t ensure that you’ll receive a loan but having a bad reputation will almost guarantee that you won’t. Having strong enough character and a great reputation used to be enough to offset a lack in some of the other C’s but those days went out the window with the S&L crises 15 years ago, at least as far as any regulated lender is concerned.
You also mentioned a lender’s request for a complete business plan. You should have a complete business plan before embarking on any new business start up for a host of other reasons besides just financing. If you don’t have one, stop everything else and put it together. The franchisor you’re working with should have lots of helpful information or even a template already developed for this purpose.
Many franchisors have also set up programs with selected financial service companies to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain that you’ve found the franchise you want to get, is to request this information from the franchisor and start looking into your options.
The key is to start early in your investigation process so that you can make a timely final decision.
The Four C’s of Financing a Franchise Purchase - To learn more about this author, visit Lori Kiser-Block's Website.
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Anne Barr
Anne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations,
networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business
ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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Lori Kiser-Block
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Lori Kiser-Block is the President of
FranChoice, Inc. the premier network of
franchise referral consultants in the
United States. FranChoice introduces
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franchisees to carefully selected
franchise opportunities that best match
their needs and qualifications. The
service is completely free for consumers
and franchisors only pay for a referral
when a referred person becomes a new
franchisee in their system.
To receive full details about the services
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You can reach Lori via email at lblock
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