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Buyer Blunders

Blunder #1: Inadequate Financing

A considerable number of people have unrealistic expectations when it comes to the funds needed to start a business. Our firm, as well as virtually every other franchisor, sends a financial qualification questionnaire with the initial information package. We then review the questionnaire to evaluate the prospective franchisee's financial qualifications prior to sending more detailed information.

Even though our package has a comparatively low cost (less than $22,500), we find 40 percent of those who return the questionnaire are financially unqualified. They often lack the necessary start-up funds and can't come up with adequate financing. Furthermore, a considerable number of the questionnaires indicate the person has virtually no cash or liquid assets. In this case, we respond with a letter explaining they're financially unqualified. Many call us back saying they expect either a bank, the SBA or our firm to provide 100 percent financing.

We don't provide direct financing--even if we did, we wouldn't be able to finance these people. In most instances, neither a bank nor the SBA will provide someone with financing unless that person is investing a significant portion of his or her own funds, boasts a good credit record and has the means to pay back the loan.

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Most people wrongly assume the SBA will provide them with 100 percent financing based solely on their good ideas. But if someone has no cash at all, it usually reflects poorly on his or her ability to manage finances--something the SBA takes into consideration.

When prospects do qualify financially, we find they usually finance 50 to 60 percent of the total investment. Most use a home equity loan, as the interest rate is lower and tax deductible. The payments can also be spread over a longer period of time. The remaining prospects get 100 percent of the necessary funds from cash savings, personal credit lines or family loans.

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