Franchise Article

Turning to Banks for Financing

As you search for ways to finance your franchise, you will most likely turn to a neighborhood bank for assistance. Before choosing a potential lender, you may want to contact them to ask if they provide loans for franchise start-ups (not all do) and if they participate in SBA loan programs. If you are turned down initially by the lender, then you can try for financing through the SBA program.

Financing Through Banks

Banks can be a good starting place for financing, particularly if they offer a large number of loan options. Bank of America, for example, offers special loans for economic development in rural areas. Remember that some of the most successful franchises don't operate within large cities but in suburbs and along well-traveled highways. The idea is to do your research and see what your particular lender has available before you start applying.

Some banks also provide working capital lines of credit. This is like a revolving credit account through your bank. Basically, you take out a loan of so much money, say $100,000. You use the money at your convenience - you don't receive a lump sum check as you would with a regular loan. As you pay off the amount you have spent, you can continue using the money. For example, if you spent $50,000 but paid back $25,000, then you'd still have $75,000 that you could use and continue to use. This type of financing can be valuable when when you need available cash flow for covering expenses during the first year.

Conventional Loans

Before you can be eligible for any type of SBA program, you usually must be turned down by a private lender first. However, don't just assume that you won't be able to get a conventional loan for your franchise. If you have everything in order, then you stand a good chance of being approved.

First, make sure you have documents showing your personal financial situation (and the finances of any of your partner). With small business loans, particularly start-ups, potential lenders are going to want to see how you're doing financially before they make any decisions. That means you'll probably have to provide tax returns, proof of income, and proof of outstanding debt.

You may also want to check your credit report for errors so they can be corrected prior to applying for a loan. These errors can hinder your ability to get financing, and credit reporting mistakes do happen.

Second, you'll need to provide all of the paperwork related to the franchise, including the UFOC. This document will provide the lender with all of the details related to the franchise. However, you should also have a business plan of your own prepared, and you should be prepared to explain how the money will be used and to proof that you have business experience.

Finally, you're going to need collateral. With conventional loans, your best piece of collateral is probably going to be your family's home. Unless you are going to be owning the building or property where your franchise is located, you won't be able to use the structure itself as collateral because it will be owned by the franchisor.

If you have all of these pieces of the puzzle put together, then the lender is going to get a clear picture of a professional who is prepared and who knows what he or she is getting into. They will also view you as a better risk for a loan than someone who comes in without any clear idea of what documentation is needed to get the loan. But don't despair if you initially get rejected - this happens to a lot of small business owners the first time out. Initial rejection is only a minor setback - there are too many other options available (including other lenders) to let one "no" destroy your dream.