Q: I've found the franchise I
want, but I don't have enough cash to completely fund the
startup of the business, so I'm going to need to get a loan.
I'm just starting to talk to banks, and they seem to want a
number of things I don't have, such as a complete business plan
with projections for the business. They also expect me to
personally guarantee the loan even though the business is a
corporation. Is my best option to use the SBA in order to avoid
these hassles, or what should I do?
A: This is the number-one topic for
questions we receive. The best source of information about your
financing options is the franchisor. They should be able to tell
you, from experience, how likely it is for you to obtain financing
from any particular source.
It may also be helpful to understand the principles that
underlie your ability to get financing, regardless of the lending
source. There are "Cs" involved in any decision to loan
money to someone: Cash, Credit, Collateral and Character.
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The fact is that it doesn't matter whether you go to a bank,
use the SBA guarantee service or go to a friend or relative for the
loan. The same basic rules apply to any successful attempt to get
credit. Here's how the four Cs work:
Cash. One of the most common misconceptions people have
is that they can borrow all the money they need to open a business.
Unless your personal net worth is far larger than what you need to
borrow, this is almost certainly not true. For SBA loans,
you'll most likely have to come up with funds-either from your
own assets or other sources-probably equal to at least 25 to 30
percent of the total investment needed to start the business,
before the SBA will consider lending to you. Lenders like to make
sure you personally have "skin in the game."
Credit. Another thing lenders insist on is a strong
credit history. This means they want to see a track record of you
borrowing money and making your payments on time. Though your home
mortgage might be the best example of a large loan you have
serviced well, you'll find you get almost no credit for that
type of loan. Everyone realizes most people will take care of their
mortgage before their other bills, so what they really want to see
is a pattern involving timely payments on other types of loans.
While a good credit history doesn't mean you'll get a loan,
a bad one almost guarantees that you won't.
Collateral. Most lenders require you to completely secure
any loan you want with personal assets sufficient to provide for
100 percent recovery if you default on the loan. It doesn't
matter one bit whether your business is a corporation or any other
type of entity, or whether you go through the SBA process-they are
going to look to you for collateral.
Character. The final condition you must meet relates to
your character or reputation. Frankly, this is like your credit
history-having great character won't ensure you'll receive
a loan, but having a bad reputation will almost guarantee that you
won't. Having strong enough character and a great reputation
used to be enough to offset a lack in some of the other Cs, but
those days went out the window with the S&L crisis 15 years
ago, at least as far as any regulated lender is concerned.
You also mentioned a lender's request for a complete
business plan. You should have a complete business plan before
embarking on any new business startup for a host of other reasons
besides just financing. If you don't have one, stop everything
else and put it together. The franchisor you're working with
should have a lot of helpful information or even a template already
developed for this purpose.
Many franchisors have also set up programs with selected
financial sources to facilitate rapid funding of their franchisees.
In this case, they should be able to walk you through the process
with a minimum of hassle for you. The first thing you should do,
once you're fairly certain you've found the franchise you
want to buy, is to request this information from the franchisor and
start looking into your options.
Good luck on finding your loan and for the success of your new
business.
has almost 20 years of experience in franchising, both as
a franchisee and a senior franchise company executive. He is
currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best matches
their needs.
The opinions expressed in this column are
those of the author, not of Entrepreneur.com. All answers are
intended to be general in nature, without regard to specific
geographical areas or circumstances, and should only be relied upon
after consulting an appropriate expert, such as an attorney or
accountant.