Before you dive into the intricacies of franchise loans, it's helpful to answer one fundamental question: Am I able to borrow the funds I need?
Determining eligibility for financing your franchise business is the first step to securing capital, and it depends on multiple factors.
Demonstrating commitment
Opening any business is a major commitment in terms of both time and money. Before you reach out to any lender, it's essential to do your research and decide if franchising is right for you.
"The first thing I want to gauge is how serious someone is about opening their business," says Ryan Romanoff, a franchise finance specialist at ApplePie Capital. "If the person hasn't talked to the brand yet, and isn't positive this is what they want to do, it's probably too early in the process to talk to us."
Keep in mind that different franchise brands may have their own requirements as it relates to financing. Always start with the brand before you seek out a franchise business loan.
Sorting out your financial profile
Next, consider your current financial situation. Among the major factors lenders will be interested in are:
Credit score
Net worth
Liquidity
For instance, while a credit score of 750 or higher is considered excellent, one of 600 or below is typically viewed as unsatisfactory. Complications like a low score will make qualifying for franchise loans more difficult.
Meanwhile, your net worth will indicate how much wealth you possess when your financial liabilities are taken into account, providing lenders with a clearer picture of your fiscal position. Liquidity will highlight how much of this wealth would be immediately available to you.
The higher your net worth and liquidity, the better.
Keep in mind that if there are multiple owners, lenders will want to know about their financial profiles as well.
Calculating your risk potential
Put yourself in the shoes of a lender and determine how much risk you represent.
"It's all a risk model," Ryan says. "Lenders are pretty direct about what they're looking for. If you understand your financial profile, you'll have a better idea of whether you can get a loan or not. Do an inventory of your assets and liabilities before speaking to a lender."
Be transparent and upfront about any issues that may impact your financial stability, such as any recent changes to your income, or ongoing legal issues.
If you find yourself in less-than-ideal financial circumstances, there are measures you can take to become a more appealing franchise loan candidate.
"The biggest one we recommend to franchisees is to add a business partner, whether it's a friend or relative," Ryan says. "This person should bring something to the table, such as strong credit, net worth and liquidity or experience in the industry you are looking to get involved in. Just be sure it is someone you will work well with."
"If you understand your financial profile, you'll have a better idea of whether you can get a loan or not."
Such an option is especially valuable for younger borrowers with unestablished financial histories and assets. By adding a partner you're essentially splitting the risk between two people and adding additional assets and experience.
Another recommendation is getting hands-on experience with the brand of your choice. Lenders look for relevant experience in the field, and being able to say you've already managed the same type of business you're hoping to open demonstrates applicable knowledge and ability.
Keep the franchise brand in mind as well. While the number of franchise brands in the U.S. is over 3,500 and growing, not all brands are created equal. A brand with a high closure ratio or minimal years operating may appear riskier than others to a lender.
"When you're talking to the brand, find out how many locations they have," Ryan suggests. "Ask about store closures and how many stores they project opening in the next year. If it's a relatively new franchise and you're one of the first franchisees, communicate that to the lender. The more upfront you are about yourself and the franchise brand, the better you're going to look."
Successful business financing for franchises starts with due diligence, and that begins with you.
Consider your commitment, financial profile and risk potential. From there, you'll know if it's time to contact a franchise loan company or return to the drawing board.
