Learn how to improve your odds of securing financing and resources for funding to buy a franchise.
A little preparation goes a long way in expediting the process of securing funding and also shows lenders you are committed to opening your own business. Before meeting with potential lenders, create a resume of your personal background that details your education and work history. In addition, gather proof of residence, bank statements and credit card statements for at least the previous 12 months along with your tax returns for the prior three years. Have your collateral ready to show that you have a vested interest in the success of your business venture and take steps to improve your credit rating. Make sure your payment history is solid, pay down outstanding debt if possible and don’t apply for new credit.
Review the Franchise Disclosure Document (FDD) and create a comprehensive business plan. The plan should include an executive summary, a detailed description of the franchise itself, the products and services that will be sold and how it will benefit your specific area. Include a marketing and sales plan outline, financial projections and a comprehensive statement of the amount of money you want to borrow, and your best estimate on when it will be paid back. An appendix can be used to collect any additional information you feel is important to share with lenders to help describe the goals you have for the business.
Be an Ideal Borrower
When you apply for a loan, lenders assess your credit risk based on a number of factors. You can improve your chances of securing funding by familiarizing yourself with what lenders look for, commonly known in banking as the 5 Cs of Credit.
- Capacity – your ability to comfortably afford payments based on your debt-to-income ratio
- Capital – additional resources aside from your regular income like savings, investments or other assets that can be used to help repay the loan
- Collateral – something you own that will be pledged as security for repayment of the loan
- Conditions – how the money will be used such as to purchase property or equipment
- Credit history – your track record for making payments on time to other creditors
There are several funding sources available to help you get the capital you need to buy a franchise.
Franchisor Financing – Many franchisors offer funding to help franchisees get their business off the ground. Some finance the costs themselves while others have partnerships with lenders that offer an array of funding options for prospective franchisees.
International Franchise Association (IFA) – IFA provides tools, resources and programs to help connect potential franchisees with funding. It also provides information on initiatives specifically designed to help women, minorities and veterans with financing.
SBA Loan – The SBA reduces the risk to lenders by offering a partial guarantee against the loan. These loans offer a smaller down payment and longer repayment terms than conventional bank loans, making them a good option for new franchisees.
Commercial Loan – There are many types of traditional business loans including secured and unsecured loans, short and long-term loans and business lines of credit. Lenders typically require a minimum 20 percent down payment.
Home Equity Loan – If you’re a homeowner you may be able to leverage the equity in your home to secure a loan. This type of loan usually has a relatively low interest rate, but be cautious not to assume more risk than you can handle.
Retirement Plans – Retirement plans can be used to fund business investments, but it can be tricky to avoid tax penalties. If you go this route, be sure to work with a reputable investment professional to ensure the process is executed properly.
Selecting a Finance Offer
It’s just as important to do your homework on lending offers as it is studying the franchise opportunity itself. There are several things to keep in mind during the decision-making process.
Determine the total cost of the financing including interest and any fees charged to secure the loan. Review the amortization schedule and how your monthly payments or interest rates may change over time. Consider how the repayment plan works into your current and expected cash flow. Also, be clear on the terms and conditions of default in the event you are unable to repay the loan as anticipated.
It can take some time and legwork to iron out funding to buy a franchise so it’s a good idea to start investigating your options as soon as you’ve been approved by the franchisor. Consider what lenders evaluate and take steps to reduce your risk factors. Terms and conditions can vary widely so it’s important to investigate multiple options to find the best one for you.