Aspiring franchise owners know the path to ownership can come with many disappointments. Few, though, are as heartbreaking as this:
"I’m sorry to be the bearer of bad news, but your small-business loan has been turned down.”
Loan turndowns still happen, though they aren't as common as they were during the height of the recession. The latest reading of the Biz2Credit Small Business Lending Index showed small-business loan approvals at big banks were up more than 50% in July from a year ago. "The 2012 tax returns have provided the big banks with financial information that indicates many small businesses are doing better now than they were during the past few years. Thus, the banks are more willing to allocate capital for small business loans, resulting in the uptick in approval rates," Rohit Arora, CEO of Biz2Credit, said in a statement.
Still, there are some steps you can take to make sure you don't get a surprise rejection.
Make sure your franchise "fits"
If you’d like to avoid hearing your lender verbalize what really is a depressing sentence, start off by finding the right franchise to buy. I know that sounds simple, but if the lender doesn’t feel that it’s a good fit for you, you probably won’t get your loan approved.
You’ll probably have to investigate several franchise opportunities before you find one or two that could turn out to be a good fit. A good fit in a franchise consists of a business that will allow you to use your top skills, is a nice match for your dominant personal traits, fits well within your budget, and makes sense for your geographical location.
Sometimes finding a good fit is an arduous process, but that’s okay because you’re worth it. Take all the time you need to find a franchise business opportunity that fits you-and fits what you want in a business.
Once you’ve found a franchise that fits, the real work begins. And while this work may not be as exciting as your search for a franchise was, it’s important for you to put a serious amount of effort into it. That’s because it can determine whether or not you’ll actually be able to open the franchise business that you’ve decided on.
Have a solid business plan
You must draw up a formal business plan.
My friend Tim Berry, who’s known as “The Father of Business Planning” and the creator of the best-selling business plan software in the world, says this:
“You need a business plan if you’re applying for a business loan. Most banks require it, and even those that don’t strictly require it expect it. They expect it to be a summary of the business, with some predictable key points.”
Your business plan can’t only consist of facts and figures, though. You need it to tell a story. You need to make it persuasive. Remember who your audience is and what it is they want. You do know what they (your banker and the bank’s underwriters) want, right?
They want to be able to sleep at night if they approve your loan. Your business plan needs to be designed to do just that.
Check your personal credit
A great business plan won’t be able to erase poor personal credit. That’s why it’s important for you to check your credit score before you embark on your franchise ownership journey.
Once a year, you can request a free credit report. It’s easy; just go to annualcreditreport.com, and fill out the information required. Once you receive your credit report(s) make sure that everything listed is accurate. If you find any mistakes, contact the creditor and ask for a letter stating that a mistake has been made. Keep it on file and make sure that the creditor informs all of the major credit bureaus.
If you find that your credit score is low, you may want to consider other financing alternatives like the ones mentioned here.