You have done your due diligence and considered the statistics on success, and understand a franchise is the way you need to get into business. But before you sign on the agreement, you need to answer this question; where you will get the cash to finance the franchise, royalty fees, inventory and working capital?
The primary thing you need to do before going to a lender is determine what your net worth is. To carry out this, use a personal balance sheet to list both your assets and liabilities. Under assets, list of all your assets—cash on hand, checking accounts, savings accounts, real estate, vehicles, bonds, securities, insurance cash values and other assets and then add them up.
The remaining part of the balance sheet is liabilities. Follow the same steps. List your bills, all your expenses, your home mortgage, car loans and the rest. Take off your liabilities from your assets. Once you have completed this sheet, you need to consider your credit score. There are three things that every lender look for in a credit score: stability, profits and credit history.
Most of the lenders are interested in how long you have been at a specific job or lived in the same location, and whether you have a record of completing what you start. In case your previous record doesn’t display stability, then get ready with worthy explanations. Not only imperative is the amount of cash you earn; however so is your ability to live within that income. Most lending firms examine your income and the how you live within that income for one good reason. If you cannot manage personal budget, the changes against you being able to manage your business finances are excellent.
The third thing that most of the times lenders look for is your track record and how good you have been in paying off previous payments. In case you have delinquent payments, repossessions and so forth, you have to get these arranged before requesting for a loan. Most lenders will contact a credit bureau to take a look at your credit report. We suggest you do the same thing before going to borrow. By law, credit bureaus are required to offer you all of the information they have on file about your credit history. Once you have got this tool, you have to correct any wrong information or at least make certain that your side of the story is on record.
After you have decided your net worth and your credit score, the last step to take before approaching lenders is putting together your business plan.
A well-deliberated business plan can make the difference between having your loan application accepted or rejected. A complete business plan should include an intimate, technical study of the business you intend to go into, projections and cost analyses; working capital estimation; a sign of your team skills; and an appropriate business plan.
Usually, franchisors are the first place where franchisees normally turn for financing. In US, almost all franchisors provide debt financing. Some of them carry the entire loan or a portion thereof through their very financing firm. Furthermore, the loans from franchisors can be structured a number of ways.
Some offer franchise loans based on simple interest, no principal, and a balloon payment, which is due 5 or 10 years in the future. However others provide funding with no payment due until after the first year. Rather than financing the entire start-up cost, franchisors may provide financing for portions of the entire cost. They will have financing plans for equipment, the franchise fee, or operational fees.
Other Financing Sources
After you’ve determined the level of financing available from the franchisor, make a list of all other available capital sources. Most operators use the following sequence: friends and family, home mortgages, veterans’ loans, bank loans, SBA loans and financing firms.
Frequently, banks that aren’t willing to work with you primarily based on your financial profile become more amenable in case you advocate working with an SBA loan guarantee; these loans are guaranteed up to 90% by the SBA. Small businesses submit a loan application to the lender for preliminary assessment, and if the lender finds the application satisfactory, he forwards the application and its credit score analysis to the nearest SBA office. After the SBA approval, the lender closes the loan and disburses the funds; the borrower makes loan payments to the lender.