Owning a franchise is a popular choice for realizing your entrepreneurial dreams. With a proven business model and established brand visibility, franchise owners have the foundational support they need to launch and grow a small business. But growth takes capital, and often that’s not all in your pocket. Financing can offer franchisees not only funding for start-up costs, but can cover your monthly lease payment, help you purchase new equipment, hire staff, and run marketing campaigns.
Fortunately, if you’re looking to expand your footprint as a franchisee (or stepping into franchising for the first time), there are a variety of financing options available to help you reach your goals, each with its own advantages, risks, and drawbacks.
Depending on your situation, you may be able to tap:
· Conventional loans from a commercial bank with varying interest rates and periods. These loans tend to go to expanding franchisees or new owners with relevant experience.
· SBA-backed loans from approved financial institutions, with the SBA guaranteeing most of the debt. These loans may feature lower down payments and other advantages, although the application process can be demanding.
· Personal loans or investments from family, friends, or associates.
· A home equity credit line, which allows you to obtain cash by drawing on the equity in your house.
· Franchisor financing loans or other monetary support from the franchise company itself, or from a partner financial firm.
· Investment from retirement funds. You may be able to invest your 401(k) or other eligible retirement assets into a franchise through a Rollovers as Business Start-ups (ROBS) arrangement.
· Peer-to-peer lenders. Online portals may offer access to lenders serving small businesses, including those focused specifically on franchisee or veteran borrowers.
Before you decide on a funding option, it’s important to know what lenders look for so you can increase your chance of approval. Financial institutions want to see that you know your business, finances, and needs, and that you’re trustworthy and can repay your loan.
You’ll need to prepare a loan package with documentation to demonstrate these points. Here are five things you should prepare for your loan application:
1. Credit Score
Check your personal credit score and clean up any errors with the credit reporting bureaus before applying for a loan. Lenders will look at your credit score as an indicator of your reliability and financial stability. A weak credit score can prevent you from getting a loan, or leave you with higher interest on any loan you do receive. (Scores higher than 780 are considered excellent, while 661 to 780 is considered good.) Many banks offer free credit reports to cardholders. You can also obtain a free copy of your personal credit report annually from three major credit bureaus: Equifax, Experian, and TransUnion.
Besides payment history and debt level, several other factors go into your credit score, including age of your accounts, hard inquiries (times you applied for credit), and tax liens. Be aware that closing old accounts can hurt your score by reducing your available credit and trimming the overall age of your accounts.
If there are missed payments or other possible black marks in your credit history, be prepared to give a clear explanation. The lender will be looking for assurances and evidence that you’re a good credit risk.
To build and maintain a good score, make sure you pay creditors on time and keep your debt levels low.
If you’ve been in business for a while, you should also make sure your business’s credit info is accurate and up to date with the agencies that issue business credit scores like Experian, Equifax, and Dun & Bradstreet.
2. Executive Summary
An executive summary is a brief loan-package cover letter introducing your business and summarizing your request. Your writing should be clear and professional, including a description of the company and its activities, management, growth, outlook, and objectives.
Your summary also should incorporate the requested loan amount, interest rate, repayment period, and intended purposes.
3. Financial Statements
Financial statements showing your income, expenses, assets, and liabilities can give your lenders a good idea of your fiscal fitness.
While the precise forms may vary depending on your circumstances and lender, the SBA recommends that small businesses include four types of financial statements in loan applications:
· A personal financial statement measuring your net worth – the sum of your assets minus liabilities. Assets may include cash, retirement accounts, real estate, stocks, bonds, cars, and life insurance cash value while liabilities can include mortgages, unpaid taxes, credit card debt and other loans.
· A business balance sheet similarly showing assets and liabilities
· A cash flow statement to measure and forecast the business’s cash inflows and outlays
· Income statements (or profit and loss statements) for the past three years for existing ventures or a 12-month projected income statement for new businesses
Keep in mind two key ratios that interest lenders: the requested total loan amount compared to the value of the promised collateral, and a measure of a business’s cash flow available for loan payments.
4. Business Plan
You’ll need to come prepared with a clear, thorough business plan. If you don’t already have one, the SBA, SCORE, and others offer free business plan templates online, and you may be able to find customized help from a local SCORE office or Small Business Development Center.
As a franchisee, you’ll find a good deal of information for your business plan in the Franchise Disclosure Document that franchisors are required to provide to you before a sale. Among other details, this vital document specifies the initial and ongoing costs associated with owning and operating the franchise.
A small business plan generally includes:
· A description of your enterprise, including your product or service
· Information on the market
· Your company’s management
· Details about your marketing plan
· Funding requirements
· Financial projections
As a prospective franchisee, your business plan should also help you consider the risks associated your endeavor and develop a clear sense of what’s involved. Building a solid business plan is no easy feat, but it’s an essential step toward owning a franchise or small business.
5. Additional Information
Once you’ve gathered all of the essential information detailed above, you’ll be well prepared to seek out a loan for your franchise.
At BKE, we’re experts at supporting franchisees with their unique accounting and bookkeeping needs. Contact us today for a free consultation to find out how we can take the books off your hands so you focus on your business.