Credit Where It's Due
Can someone with bad credit qualify for a franchise loan? We talk to two SBA lenders for some inside tips.
Eric Davis e-mailed us for advice. He wants to know if he could qualify for a loan to purchase a Curves franchise. Twenty years old, Davis admits his credit is not good and fears his youth will be a problem in getting a loan. I checked with two sources and get their professional opinion on Davis' situation.
Chris Lehnes, vice president of business development at CIT Small Business Lending: "CIT, like most SBA lenders, looks for a few [specific] things in a franchisee. One is the strength of the franchise. If we're going to lend money for a franchise business, we want to feel really comfortable about the franchise. Curves is a franchise we like, but there's a little footnote. We make all our loans under the SBA program, and they have requirements that a business cannot discriminate in any way. So Curves, as long as they have a full facility for men as well as women, we can consider it. But if there's no men's changing room or bathroom, it's not eligible for SBA financing.
"Second, we look at the operator. We look at whether he or she has good personal credit. It doesn't have to be perfect credit, but we want to see generally good payment. Without seeing this particular [prospective] franchisee's credit report, it's tough for me to say, but generally, if someone has bankruptcies, lots of judgments, tax liens, the chance of getting SBA financing is very small. Then we look for management experience, though it doesn't necessarily have to be in the exact type of business. So someone who's 20, I'm not saying it's an absolute no, but they can't be fresh out of school. He needs to have had some time working, managing. If this 20-year-old is someone who, for the last three years, has been working at Curves and managing it part time, he might be an ideal candidate. But that is something we want to see. So 20 and just graduated, probably not, but 20 and working in this role for a couple of years, very possibly so.
"Very honestly, it's very difficult for someone in that position. You can leverage all your assets, take a lot of partners like family and friends until you get it up and running, but short of that, there aren't a lot of alternatives."
Michael Seid, managing director of franchise advisory firm Michael H. Seid & Associates: "Even if you are looking to acquire a popular and successful franchise brand, the chances of your being able to borrow money when you have no credit or, in this case, poor credit is not very good. The best way to raise that type of money is from friends and family, since they know you on a personal level.
"If the franchisor has a relationship with a lender or an equipment finance company, they will be in a better position to know the risk profile the lenders are looking for. It is doubtful that the franchisor is going to guarantee your debt, so the lending scores are what you need to rest on.
"We have advised franchise candidates in similar situations to talk to the franchisor and see if there are any franchisees who are looking to expand. Occasionally, a franchisee who is ready to expand can't do so because he or she does not have qualified management for the next location. The candidate might be able to earn into a franchise through some long-term sweat equity.
"The alternative and likely best advice is for him to get a job. Pay off his debts. Get his credit house in order and come back to this in a few years."