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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.

Opinions expressed by Entrepreneur contributors are their own.

Eric Davis e-mailed us for advice. He wants to know if he couldqualify for a loan to purchase a Curves franchise. Twenty yearsold, Davis admits his credit is not good and fears his youth willbe a problem in getting a loan. I checked with two sources and gettheir professional opinion on Davis' situation.

Chris Lehnes, vice president of business development at CITSmall Business Lending: "CIT, like most SBA lenders, looks fora few [specific] things in a franchisee. One is the strength of thefranchise. If we're going to lend money for a franchisebusiness, 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 haverequirements that a business cannot discriminate in any way. SoCurves, as long as they have a full facility for men as well aswomen, we can consider it. But if there's no men's changingroom or bathroom, it's not eligible for SBA financing.

"Second, we look at the operator. We look at whether he orshe has good personal credit. It doesn't have to be perfectcredit, but we want to see generally good payment. Without seeingthis particular [prospective] franchisee's credit report,it's tough for me to say, but generally, if someone hasbankruptcies, lots of judgments, tax liens, the chance of gettingSBA financing is very small. Then we look for managementexperience, though it doesn't necessarily have to be in theexact type of business. So someone who's 20, I'm not sayingit's an absolute no, but they can't be fresh out of school.He needs to have had some time working, managing. If this20-year-old is someone who, for the last three years, has beenworking at Curves and managing it part time, he might be an idealcandidate. But that is something we want to see. So 20 and justgraduated, probably not, but 20 and working in this role for acouple of years, very possibly so.

"Very honestly, it's very difficult for someone in thatposition. You can leverage all your assets, take a lot of partnerslike family and friends until you get it up and running, but shortof that, there aren't a lot of alternatives."

Michael Seid, managing director of franchise advisory firmMichael H. Seid & Associates: "Even if you are looking toacquire a popular and successful franchise brand, the chances ofyour being able to borrow money when you have no credit or, in thiscase, poor credit is not very good. The best way to raise that typeof money is from friends and family, since they know you on apersonal level.

"If the franchisor has a relationship with a lender or anequipment finance company, they will be in a better position toknow the risk profile the lenders are looking for. It is doubtfulthat the franchisor is going to guarantee your debt, so the lendingscores are what you need to rest on.

"We have advised franchise candidates in similar situationsto talk to the franchisor and see if there are any franchisees whoare looking to expand. Occasionally, a franchisee who is ready toexpand can't do so because he or she does not have qualifiedmanagement for the next location. The candidate might be able toearn into a franchise through some long-term sweat equity.

"The alternative and likely best advice is for him to get ajob. Pay off his debts. Get his credit house in order and come backto this in a few years."

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