When looking to purchase a franchise, there are a few hurdles that are inevitable. Picking which franchise concept suits you best is the first major hurdle that must be overcome. Once you have done this, the next biggest hurdle is finding a loan to finance the purchase or startup of your new franchise. In order to start the process of finding financing, you should create a business plan, understand your financial strengths and weaknesses, and then connect with the right lenders that will be able to best help your specific situation.
Where to Start
As mentioned above, establishing a strong business plan & understanding the franchise brand are essential before you are ready to start looking for financing. You should do your research to learn about best practices for your specific franchise so that you have a good idea of how to proceed with your new business venture.
Before deciding which franchise concept to work with, you should review the franchise disclosure document (FDD) and speak with existing franchisees help you formulate your own business plan and start financial projections. Understanding your personal credit history and financial strength will also play an important role in opening a franchise business.
Understanding the Lending Market
If you’re looking to open your first franchise, you could nicely fit into a Small Business Administration (SBA) loan product. SBA loans allow lenders to extend credit to new borrowers by taking advantage of a guarantee that the SBA provides to the lender in the event of default. Flagship SBA 7a gives the bank a 75% guarantee if the loan defaults – so that the money that the bank lends to you is not entirely at risk.
Liquid assets, valuable collateral and good credit all go a long way to helping you get a franchise loan. In some instances, the franchise itself will extend financing to you or give you a list of preferred lenders. Some franchises, such as Subway, may buy back locations from existing franchisees and then sell them to you as a new location. This way you will be taking over an already established store (sometimes including the existing employees and inventory).
How Much it Will Cost
Some brands will provide upfront estimates of how much it will cost to start a new business. They can also give you information on monthly and year-over-year revenue goals and forecasted financials. This information can be found on the franchise disclosure document. However, franchises are not required to provide this information, and that is why we suggest speaking with several existing franchisees before deciding which concept to work with. After you acquire this data and make your own financial forecasts, you should make sure you understand how long it will be before your business will break even. When determining break even, make sure to include your expenses, along with any loan payments you have. Next, when determining your loan amount, make sure to include working capital to get you through the start-up phase of the business. When lenders look at your loan application, they will pay attention to several key things. One of the most important things that you should be aware of is Debt Service Coverage Ratio (DSCR). DSCR is a measure of the cash generated by the business which would be available for the loan payments. A higher the DSCR means that there will be a cushion of cash in case there are unforeseen issues or slow periods for the business.
How to Apply for a Franchise Loan
After doing all of your due diligence, you can now start to think about which lender you want to connect with. By now you should have identified the franchise you wish to pursue, and should have your documents and loan package organized and available for the lenders you pursue. Accessing capital to start your business is perhaps the most difficult step in the start-up process. An alternative lender, like Harbour Capital, might be more familiar with the certain concepts and could help guide you along the way in your business venture. Harbour Capital has made loans to franchisees from a wide array of concepts, including Subway, Jersey Mikes, Jimmy Johns, Little Caesars, Dairy Queen, Wingstop, and many more. When choosing your lender, you should not use a shotgun approach and shop around for the lowest rate.. This approach can lead to inefficient use of your time and money and can lead to several declines from lenders as you blindly submit applications. Additionally, some lenders charge application fees so it can get expensive. When you’re looking at where to apply, you should figure out if the lender does a “hard” credit pull on you when you apply, or a “soft pull”. Multiple hard credit pulls within a timeframe will actually hurt your credit score and decrease your ability to get a loan. Harbour Capital only does soft pulls, so applying with us will not affect your credit.
If you are using the web to help you acquire a loan, beware sites with poor Better Business Bureau ratings. These sites may just want your contact information which they then sell to brokers and lenders. Harbour Capital has an A+ rating with the BBB.
Lastly, online resources like the U.S. Small Business Administration & the International Franchise Association can help you with every step of the application and startup process. We can even give you references from within your potential franchise concept that we have worked with before, so that you can better understand the process and hear firsthand how Harbour Capital has helped other franchisee’s acquire financing.