Yes, You Can Still Finance Your Franchise Purchase.

Published on August 21, 2014

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Finding the right loan or loans to purchase your franchise is not what it used to be. But you can still get the right financing with just a little knowledge.

Got turned down by your bank for a franchise purchase loan? Know that you are not alone. Or, are you afraid that you will get turned down for that loan? Sure, it is a common fear these days as getting a business loan or franchise loan can be very frustrating.

But, with a little knowledge on your side you can alleviate that fear and start charging forward in your franchise purchase as you will never get anywhere unless you start moving forward and moving forward right now.

Keep this in mind: All business lending dropped off after the financial crisis in 2008 including Small Business Administration (SBA) lending. Yet, over the last few years, while bank lending still remained stagnate, the SBA had some banner years in regards to the number and amount of small business loans they backed  – no where near what they were doing prior to 2008, but they have had some good lending years recently.

And, on top of that, according to the Wall Street Journal:

 “About 10% of all SBA loans go to franchisees, with the size running between $250,000 and $500,000, and maximum of $2 million.”

So, if they can do it – these 10% – then so can you. You just have to start with the following 3 key issues in mind:

 3 Key Issues To Improve Your Chances of Financing Your Franchise Purchase

While there is a great deal of individual items that go into getting a franchise loan approved, the following three items are the foundation on which all those other requirements (and ultimately your approval) will be based on. Get these three things right in the beginning and you improve your chances of getting that needed financing by ten fold:

1) Credit Matters.

Your personal credit matters. Any lender – be it for a franchise loan or be it for a personal home loan – will pull your personal credit report and the personal credit report of anyone whose name is on the credit application (or that is on your franchise purchase agreement).  And, if you have problems here – meaning that your credit score and credit history is not in the stratosphere – then you need to get that fixed before applying.

And, the good news is that it is not all that hard to do. Simply pull your credit report and see where you have problems.

First – make sure you are paying your current bills on time and as agreed. If you are late on any of them or have been late – then catch them up right away. If you are not willing to do even this most simplest of tasks – then why would a lender be willing to lend you a large chunk of money that they may never get back?

Second, according to Bankrate.com; your credit limits and your balances are key in improving your score.

“One of the major factors in your credit score: how much revolving credit you have versus how much you’re actually using. The smaller that percentage is, the better it is for your credit rating.”

And, lastly, according to myFICO.com;

“Don’t close unused credit cards as a short-term strategy to raise your score. And, don’t open a number of new credit cards that you don’t need, just to increase your available credit.”

Bottom line is that you should only have the credit you need and then manage that credit as you are expected too – and you will never have to worry about your credit score again.

2) Down Payment

No matter what type of loan you are seeking from a bank or other business lender, all will require that you have some “skin in the game” as they say – a sharing of the risk.

This means that you have to put your own money down to get your loan approved. The lender thinks that if you put some of your own money down, you will work harder to ensure that you don’t lose that money and the only way to ensure that is to continue to make loan payments to the lender – no matter what.

So, the question becomes how much down?

According to Bernie Siegel, founder of Siegel Capital LLC and a broker of small business loans; Prior to the financial crisis, “the range was typically 10% to 30% of the franchise start-up costs, with 20% being the most common figure. In the present atmosphere [however], we have seen some lenders move from 15% to 25%.”

That is a lot of money for a down payment. For a $250,000 loan, your down payment would range from $37,500 to $62,500. Or, for a $1 million loan, you would have to come up with some $150,000 to $250,000 in cash out of your own pocket to get your loan.

While this is not an easy concept to digest, know that this is the way it is. So, quit worrying about it and look to find ways to raise that kind of capital – without your down payment, you cannot move forward.

3) Collateral

Lastly, collateral. All lenders these days are afraid of not getting repaid and facing again the scrutiny they did during the economic meltdown of just a few years ago – so they are doing more things to make sure that they are 1) approving better loans from their prospective and 2) making it harder for borrowers to get those loans – thus those that persist enough to actually get approved and usually the ones that pay.

So, like requiring a down payment, lenders also require that you put up enough collateral to cover the loan’s principal. And, the amount of collateral is rising each year.

When asked about how much collateral is needed these days, BusinessMart.com, claims that;

“Collateral requirements were previously around 40% of the franchise costs. However, now that amount is closer to 100%.”

This means you will have to come up with some form of collateral – business or personal – to cover the entire amount requested.

Hopefully, your franchise will include property and equipment that will cover the majority of the collateral requirement – but, if not, you may have to put up your personal home, your personal vehicles, your personal stocks and retirement accounts and so on.

But, in the eyes of a franchise lender, if you are not willing to take a risk on yourself, then they are not willing to take a risk on you either.

Conclusion

Now, having said all that, know that franchise lenders are in the business of lending money and if they do not lend money they will go out of business. So, they do want to lend.

And, most all business lenders love franchise businesses as they have solid business models, great name recognition and a huge network of knowledgeable persons willing (either on their own or because they have a monetary reason to do so) to help you and your franchise succeed.

But, they also have been burnt too many times and, in combination with this poor economy, are being extremely cautious – as putting out bad loans will also force them out of business.

However, if you have your loan foundation in place – your credit, your cash and your collateral – in place, then you have already surpassed any lender’s initial screening process which should get you that one needed chance to sell yourself and your franchise to get your loan approved. Can’t really ask for more than that.

Written by FranchiseGrade.com Team


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