What Banks Look for When Financing a Franchise Purchase | FranFinders
You’ve found the perfect franchise, done your due diligence, and are now driven to make your dream of being a franchise owner come to life. However, the process of turning that dream into a reality isn’t always cut-and-dried. Before you can sign any franchise agreement, you will need to have the money in place for financing the franchise. Obtaining a loan for a franchise can be a daunting task, even for people with good credit. Whether you plan on borrowing from a bank, a SBA or any other lender, you will go through a rigorous evaluation based on the following criteria.
Banks and franchise companies examine your credit history as it provides indications for creditworthiness and your ability to manage finances. In many cases, you will be expected to have a score of at least 700 in order to even apply for the loan. If the score is under 650, the client will typically have to provide an explanation for poor credit history.
In most situations, you will be required to secure a loan with collateral. Due to the fact that lenders are putting money down at risk, they look to see that you have a mortgage on your home or some other asset that can support the repayment if need be.
Lenders will look to see if you have a savings and are able to put down your own money against the loan. The average amount that a client would have to put down is 20% of the loan total.
Lastly, lenders will pull a background check to examine your potential as a franchise owner. It is common to look into your work and managerial experience in order to determine how qualified you are to run a business.
Before applying for a loan, work on cleaning up your finances. There are credit rating agencies that can help clean up errors on your credit report. Also, try different ways to lower your personal finances, such as refinancing your mortgage, in order to save up and pay off debt.
Another tip is to choose a franchisor that has proven to be successful and has good financial records. There is a better chance a lender will approve if they trust the brand and the brand has a long history of running profitable branches.
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