Your eligibility. Each franchisor has its own set of requirements for you to meet, and from there you’ll need to meet the criteria any lenders have. Confirm eligibility with the providers you’re interested in to see whether you meet their minimum standards. If not, you have the option of learning what you can change to make the cut. And keep exploring your other providers.
If you own the business entirely by yourself and plan to be responsible for all debts and obligations, you can register for a sole proprietorship. Be warned that this route can directly affect your personal credit. Alternatively, a partnership, as its name implies, means that two or more people are held personally liable as business owners. You don't have to go it alone if you can find a business partner with complimentary skills to your own.
If you're thinking about starting a business, you likely already have an idea of what you want to sell, or at least the market you want to enter. Do a quick search for existing companies in your chosen industry. Learn what current brand leaders are doing, and figure out how you can do it better. If you think your business can deliver something other companies don't (or deliver the same thing, but faster and cheaper), you've got a solid idea and are ready to create a business plan.
Keep in mind that whenever you’re applying for a business loan, whether it’s for start-up costs, working capital, or real estate, it’s a good idea to complete more than one loan application so you can compare rates and terms. Most lenders will only do a “soft” pull on your credit in the pre-qualification stage and will not do a hard pull (the kind that dings your credit score) unless you accept the loan offer.
If your bank is hesitant about a particular franchise system’s performance, or your finances aren’t as strong as they could be, you might want to consider an SBA loan. SBA doesn’t lend to business owners directly; it provides a repayment guarantee to banks and lenders for money they lend to small businesses, making it less risky for the banks. Use this search tool to find the right SBA loan for you.
Depending on the size of your loan, your financial statements and accounting records will be reviewed carefully by the lender. So make sure they are complete, correct, and thorough—including balance sheet, income and loss statements, and cash flow statements. The lender will analyze your cash flow, gross margin, debt-to-equity ratio, accounts payable, accounts receivable, EBITDA, and more, so be prepared to answer questions on those topics. Consider having your accountant look over your financial statements to anticipate issues a lender may raise.
So it pays to have a comfortable cushion, just in case things don’t pan out as expected. And it’s much easier and cheaper to arrange funding when times are good than it is when you’re desperate. Of course, you don’t want to be paying interest on unnecessary debt either, but there are funding options, like lines of credit, that you only pay for when you activate them. In any case, it’s worth researching your options early on.
So think about how you can diversify your own business. Think about the risks you’re subject to, the technologies you’re dependent on, and how changes in the competitive landscape could blow you off course. Then come up with ways in which you can create multiple income streams, so that if one product or service is no longer popular, others can pick up the slack.
The lender will want to know how much funding you are seeking and how the loan proceeds will be used. Will the loan be for equipment or capital expenditures? Expansion or hiring? Increase in inventory? Enhanced sales and marketing efforts? New research and development of technology? New product development? Expansion into new facilities or territories?
- Let's talk a little bit about the future. At some point your business is going to near the final stages of being a small business and start to evolve into a medium, or even a large-sized business. The question is: who is going to lead this business at that point? Before we talked about the org chart and the difference between the founder and the president. Odds are, you have been filling both roles. The founder is the visionary, and the president is the person who makes the business run. But, when it comes time to transition into that medium-sized business, really it's time for you exit one or both of these positions. Why is that? Well, you have learned certain skills that have helped you succeed as a small business owner, but, a different set of skills is required for a large or medium-sized business, and there are people out there who have those skills. They have that expertise, and it's much better to hire someone else, rather than you put this burden on yourself. I've often seen…
Some franchising companies run their own franchise financing programs that help franchisees get in the door. Program offerings and requirements vary by franchisor, with such options as limited-term loans, reduced license fees or reduced royalties, and minority stake ownership by franchisors. Some companies, like Ace Hardware, offer financing to existing franchisees to open a new store or buy out a competitor.
Proof of ability to pay: As Ali told me, banks want to be sure you’re positioned to make the loan payment on time each month. You’ll need to present detailed financial statements showing that your income is at least 1.25 times your operating expenses, including the new repayment amount. For example, say your business makes $15,000 a month and your current expenses are $10,000. With the loan repayment added to your operating expenses, you need to be sure your income still exceeds the recommended 1.25 threshold.
Banks want to see a history of successful borrowing anytime they make a loan. That includes loans for your business. Unfortunately, many businesses don’t have any history of borrowing (especially new businesses), so lenders look at your personal credit scores instead. If you’ve got good credit, that’s a good sign that you’ll handle the business loans well. If you’ve got bad credit, lenders will be more skittish about lending. If your credit is “thin” because you haven’t borrowed much in the past (or if it’s in need of some repair), you may need to build your credit before lenders are likely to approve you for a loan.
Also make sure you have a structured process for setting measurable objectives, reviewing your progress, and adjusting the objectives or setting new ones. A good way is to keep a simple monthly checklist of the most important items. All of this should be driven by your overall business plan (you do have a business plan, don’t you?), and you should use the data you collect to help you keep the plan constantly updated.
In most cases, maintaining a good business credit report is enough to qualify. In addition, it instills confidence not only in the lender, but also in you. There is at least one SBA office in every state in America. If you contact them regarding the startup status of your business model and plan, you can get started on a government small business loan that will give you the financing to make your dreams a reality.