Financing Your Franchise

What Franchise Lenders Look For

"Most lenders will first consider the four C's of lending, which are capacity, collateral, credit and character," DeBolt says.

Capacity refers to whether or not you can repay the debt, which will mean examining your potential earnings and expenses.

Collateral is an insurance policy for the bank. It refers to any property you own that the bank may hold if you're unable to repay your loan.

Your credit history will give lenders an indication of whether or not you're likely to repay your debt. They'll check your credit report to see how much you owe, how often you borrow and whether or not you pay your bills on time.

Lenders look at your payment history, and they'll take lawsuits, bankruptcies and tax liens very seriously when considering your character. They'll also do a background check and evaluate your previous work experience. Experience in the franchise industry can work in your favor.

Lenders also scrutinize the management skills of franchisees, Neagle says. "We look for quality, professional people who'll make a significant commitment to the business and who have a good, sound business plan that has sustainability," he says. "We also look for lenders who'll be investing some of their own money, which shows they have faith in the business' success, and we look at the overall stability of the franchise itself."

Most lenders require you to show them a business plan that spells out your goals for the franchise's growth and profitability, and to explain how much money you'll need. You'll usually have to provide three years' worth of tax returns; a cover letter describing what you're looking for, including the loan amount and how you intend to repay it; a personal financial statement; and financial projections. The latter figures are estimates of how much you expect to earn and what you believe your expenses will be, which can be estimated by talking to other franchisees who have bought the same franchise in similar markets.

Putting the results of your research on paper is necessary, says Edina, Minnesota, franchisee Jim Gendreau, who has owned many franchises over the past 14 years, including, at one time, more than 50 Cost-Cutters Family Hair Care salons.

"You can't just give potential lenders an advertising brochure, say you called three or four franchisees and that you think you'll do well," he says. "It's important to sell your idea to your lender with facts and figures."

If you need help developing your business plan, there are several places you can turn.

"In many instances, existing franchisees will be happy to share their business plans with you," DeBolt says. Franchisors also offer some help; many will refer you to consultants they have on hand to answer questions. Consult with business experts, and contact other franchises for information such as typical store sales and cost of goods.

"Consult with a franchisor or an independent accountant to review your plan critically," Neagle urges. "Compare your projections against comparable store projections."

Or you could gather your own advisory board, as Gendreau did recently while working on his business plan for a new franchise. He asked five businesspeople for assistance: a business attorney, a CPA, a mergers and acquisitions expert, an advertising executive and a business writer. They've advised him on his business proposal, free of charge. Initially, Gendreau's relationship with these advisors was a kind of mentorship. Over time, he's made the relationships reciprocal, and now regularly returns the favors by providing his own expertise, also free of charge.

Once you've got your business plan in hand, it's time to choose the financing option that's best for you. Consider the following choices:

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This article was originally published in the September 1997 print edition of Entrepreneur with the headline: Financing Your Franchise.

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