Choosing the right franchise to purchase can be an exhausting task, and securing a franchise loan can seem even harder––especially if it’s your first time franchising.
Drawing up a business plan, laying out your current finances on paper, and finding the best way to obtain a loan can seem like huge tasks. But understanding the process and what resources are available to help you along the way can make the loan process much clearer.
Whether you’ve found the right franchise opportunity or are still researching what you’ll need to make your goals of business ownership a reality, here’s an easy-to-follow step by step guide to securing a franchise loan to help you fund your venture:
1. Draw up a compelling business plan
This is one of the most crucial steps of the entire process. Lenders need to see a clear picture of your business plan before working with you to find the right financing plan.
The first thing to do to prepare is get a strong understanding of the franchise brand you’ll become a part of. Here are some great ways to get fully acquainted with the brand:
- Review the franchise disclosure document (FDD) in full and highlight the areas that explain what kind of business model the company suggests their franchisees follow.
- Talk to existing franchisees to get firsthand knowledge of how the business works and how long you might expect to see a return on your investment.
- Speak with financial professionals and reach out to the franchisor to help come up with a clear way to communicate the business model and plan with your lenders.
Franchisors typically give you a loose working business plan for you to use, so be sure to contact the franchisor for assistance first. Much of the information you’ll need will be found in the FDD given to you by the franchisor.
2. Get your current credit report in order
Lenders require credit report reviews for virtually any kind of loan imaginable. If you’re unfamiliar with credit reports, they track your purchasing and payment history as well as employment and residency information––all of which your lenders will need to review thoroughly before granting any financing.
Your credit information is gathered by three national credit reporting bureaus:
How do you get your credit report?
Obtaining your credit report is a simple process. AnnualCreditReport.com is a secure government website that provides anyone with a credit report free of charge.
Since each bureau keeps records independently of each other, be sure to get reports from all three to make sure your numbers are accurate.
Wondering what lenders are looking for in your report? Here’s a short list of what they look at when making their decision:
- How long your credit history is. Typically, the longer, the better. Apart from this, they want to make sure you’re capable of making payments on time.
- The number of credit accounts open and how many are currently holding a balance. Lenders usually favor fewer balance-holding accounts.
- Collection agency activity
- Declarations of bankruptcy
- Outstanding debts
- Number of credit applications you’ve applied for recently
3. Obtain your credit score
For a small fee, your report request can also include your credit score, which lenders will certainly want access to before issuing a franchise loan. While each bureau produces its own score, the one lenders typically want to examine the most is the FICO score.
These are provided by the Fair Isaac Corporation and your payment history, amounts owed, length of credit history, new credit, and credit you’ve used to calculate a score between 200 and 850.
4. Determine which kind of loan is right for you
It’s important to have a good understanding of the lending market before setting out to find the best lenders. For franchisees looking to launch their first business, Small Business Administration (SBA) loans are a great fit.
What is an SBA loan?
In short, these are loans made by banks and other non-government lenders that allow extended credit to you, the borrower. They do this through a guarantee that the SBA provides to lenders in case you have to default on the loan.
Generally, having liquid assets, collateral, and a high credit rating will have lenders smiling when it comes time to decide on a loan.
The Wall Street Journal found that most banks look for about 20 percent of the franchise startup costs to come from you before considering a loan, so be sure you have at least that much ready to invest out of your pocket before applying.
5. Apply for your franchise loan
Before applying, make sure you’re well prepared to engage a lender. A great first impression will show you’re well prepared and capable of repaying the loan when the time comes.
The next step is to figure out where you should apply. Look to your own bank and other local business lenders before approaching a national one. Engage those who may be familiar with the brand and might have dealt with franchisees in the past.
When you have a lender or a short list of lenders ready to go, be sure you check for application fees to be sure you’re not getting in over your head. Lastly, be aware the process can take up to 120 or sometimes even 190 days before your funds arrive.
If you’d like to learn more about SBA loans, click here for the U.S. Small Business Administration website which offers a number of online resources for those looking to secure a franchise loan.
If you’re interested in a low-cost franchise opportunity offering low startup costs and minimal monthly overhead, click here to learn why The Groutsmith stands out as the leader in grout and tile cleaning, repair and restoration. Want to connect with us one-on-one to get started? Contact us today.
Looking to learn what it’s like to own a Groutsmith franchise? Get a first-hand look from eight franchisees in our free Q&A guide. Click below to download.