Credit and franchise purchasing don't necessarily go hand in hand. In evaluating your creditworthiness, franchise lenders will evaluate your background and the franchise's background. Lenders are more likely to give you a franchise loan if the franchise is established and well-known, not a brand-new franchise in its initial expansion stage.
Financing is one of the major concerns of many aspiring franchisees, and for good reason.
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In addition to the typical small business startup costs, franchise owners are also expected to pay an initial franchise fee – a significant sum for a business just trying to get off the ground.
To cover their startup costs, franchise owners typically invest a portion of their own resources and turn to family and friends for investment capital. But often these amounts are not enough to cover the entire cost of starting a franchise. Franchisees are often forced to make up the difference through financing.
Franchise financing can be obtained through a number of sources including banks, credit unions, and even franchisors themselves. All of these lenders will require you to meet certain lending criteria before they commit to financing your franchise. Although the decision-making process can be complex, there are some basic indicators they will look for in every potential franchise borrower.
Strength of the Franchise
Lenders will be interested in learning more about the franchise itself to ensure that the operation will be viable over the long-term. Understandably, an established and well-known franchise will be viewed more favorably than a brand-new franchise in its initial expansion stage. By assessing the strength of the franchise, lenders will also gain insight into the average earnings potential of the company's franchisees – another key consideration in the lending decision.
Work Experience of the Franchisee
Lenders also want to know that you are capable of managing the franchise for which you are borrowing. If you are requesting financing to open a restaurant franchise but have no experience in the food industry, your lender will likely challenge your ability to run a profitable venture. In some cases, they may recommend that you work as an employee in a similar operation to gain experience before opening your own franchise.
Does your credit rating have to be perfect to obtain financing for a franchise? No, but it has to be good. Franchise financing is like any other type of lending. The lender needs to be reasonably certain that you will repay the loan in a timely manner. But a track-record of defaults and nonpayment tells the lender that you may or may not repay them – even if you have the capacity to do so. If your credit is less-than-stellar, you might want to consider meeting with a credit consultant to see how you can improve your rating before applying for financing.
Another thing lenders will be looking for is how much money you have to invest in the franchise yourself. If you're planning on financing 100% of your franchise start-up, you're going to be disappointed. Lenders almost never provide full financing for any small business start-up, including franchises. But don't give up, even if you don't have any financial resources to invest in the franchise. Instead, meet with your lenders and find out firsthand how much financing they are willing to extend and how much you'll need to save to make your franchise a reality.
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