Starting Your Franchise: Steps for Financing

For entrepreneurs, starting a business, particularly a franchise, can be a burdensome task.  However, what can sometimes prove to be more difficult, once that unique franchise is determined, is finding a franchise loan to fund the venture.  Formulating a business plan, understanding your financial strengths and weaknesses, and pairing with the right lender are just some of the initial steps toward your end goal: approved financing.

Understand YOUR business.

First, know and understand your business. By establishing a strong business plan along with getting to know the details of the franchise brand, you are putting yourself in a good position with your lender by showing the knowledge and aptitude to successfully run the business.  Often, a document known as the franchise agreement will be provided to the prospective business owner.  This document is the contract between the franchisor and franchisee.  Understand what you can and can’t do as the franchisee under that agreement.

Financials. Along with the franchise agreement information, typically a franchise will be able to provide numbers for other currently operating franchises, perhaps in a similar market, to gauge the profitability of opening the new business.  Those numbers are key.  They have historical backing.  Lenders will want to see a pro forma or financial projection with details behind those numbers.

Next, understand YOU as the franchise owner.  Does your management and operational styles align with the franchise you are seeking to own?  Once established, it’s time to take that information, along with your professional and marketing skills, past successes, future goals, market and/or network partners, and any other professional highlights and add them to your resume that will be presented to the financial lender. This is known as your loan package.

So where do you begin with seeking the appropriate financial lending partner?

Besides draining your existing 401(k) plan, taking a second mortgage, or the dreaded ask of friends and family for capital, you probably have a better fit with a traditional lender. 

Because a new business, especially a franchise, comes with exponential risk, financing through a loan product with the Small Business Administration (SBA) and a preferred lender of the SBA is one of the better choices.  SBA loans allow the lender to extend credit by guaranteeing the loan up to a certain percentage.  For example: the leading SBA 7a product gives the bank a 75% guarantee if your loan defaults to help lessen the risk involved with a startup.

There a few key items that lenders take into consideration before determining whether to extend credit.  Having a good credit score, a secured interest (valuable collateral), liquid assets and an acceptable amount of capital injected from the owner – typically 20% -- are all taken into final consideration.

Now what?  It’s time to apply.

Step one.

Be organized and well-prepared.  Know your franchise and create a loan package that includes the business plan, resume, financial projections, personal financials such as tax returns and a personal financial statement, an opening day balance sheet and evidence of the initial owner’s equity injection.  The details and organization of this loan package goes a long way with developing rapport and trust with the lender.

Step two.

Find your lending partner. As aforementioned, an SBA guaranteed loan is most likely the route you’ll want to pursue.  Choose a lender with SBA preferred lending status to work with, such as State Bank of Cross Plains. You’ll want to avoid just applying anywhere or everywhere.  This approach will cost you time and money, and will likely lead to more declines than you’d prefer to know.  Seek a lender that you are comfortable with, one who will understand both you and the franchise. 

After you’ve found the right lending partner, be prepared to answer questions regarding the operations and financials that you’ve provided.  This goes back to the full understanding of the franchise.  The bank will need to conduct a thorough underwriting of the loan application with supporting documents before making the final approval. 

Congratulations on owning a franchise!

Once approved and signatures have dried on the loan documents, enjoy the venture and ride of being a new franchise owner!  State Bank of Cross Plains is here to help make this your reality. Consider us your partner in franchise lending.

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