So you’ve decided you’d like to be a franchise owner. You’ve (hopefully) read our posts about how to analyze a Financial Disclosure Document and how to get financing to buy a franchise, and after some diligent effort, you’ve decided on the franchise that is right for you.
Now, you’ll need to apply for financing, and that means assembling a loan package to present to potential lenders. The amount of detail required will depend on the types of lenders you turn to, but the “best” loans, such as SBA-backed and other commercial loans, will require a great deal of information about your situation and business plan.
These lenders will want convincing evidence that you understand the business you are entering, that your expectations of success are justified, and that they can recoup their losses if those expectations do not pan out. By assembling a loan package with as much detail as possible, you will both be able to present that evidence convincingly and speed up the lending process by facing fewer requests for more information.
THE ELEMENTS OF A COMPLETE LOAN PACKAGE
- Details of your financial standing. Many franchises have minimum net worth and liquid net worth requirements for franchisees, and you have presumably met those. Now it is time to show those numbers plus many more details to lenders.
- Your credit scores. There is far more to being approved for a franchise loan than your credit score, and in truth, a “good” credit score is unlikely to be a key determinant of the outcome. A “bad” credit score, however, is usually a deal breaker all by itself, so you will want to be sure you have addressed any aspect of your score that you have control over and be prepared to explain any missed payments or other issues.
- Your net worth and how much of that you are willing to offer as collateral for the loan. This can include not only cash and investments but assets like your home.
- Details about the franchise. Lenders will want to know about your chosen franchise’s record of success. What kind of competitive advantage do they offer? How have previous franchisees fared? How quickly have franchises become profitable? What training and support will it provide, especially if your knowledge of their business is limited? You will find most of these details in the Financial Disclosure Document, and some lenders may even require a copy of the FDD.
- Your business plan. For some alternative lenders, a brief summary of your business plan may suffice, but for SBA loans and other commercial-based loans, you will need to provide a significant amount of detail to demonstrate that you understand the business more than you understand the market and that you can have realistic profitability and cash flow projections that will satisfy any loan payment requirements.
- The franchise agreement. Lenders will examine the responsibilities of each party, the fee structures, the assets and support provided by the franchisor, and a variety of other details that will directly or indirectly impact your ability to generate cash flow to meet loan obligations. You will usually need to provide the lender with a copy of the agreement you will be signing, which will verify many of the details you will be presenting as part of your business plan.
- Your management team. Lenders will want to know not only your own business experience but also that of any partners or employees that will be involved in the business. One of the benefits of buying a franchise, of course, is access to the expertise provided by the franchisor. Still, if you are bringing knowledge and experience aboard internally, you will want to call attention to it. And if you have hired outside experts, you will want to detail their value to the expected success of your business plan as well.
- Executive summary. This will be the first item in your loan package, but we’ve left it for the end because it is essentially a cover letter summarizing what we’ve discussed above. It should be concise – only one or two pages in most cases – and professional. You’ll want to include the following:
- The purpose of the loan, such as franchise fees, real estate, inventory, equipment, or salaries.
- Details of the specific franchise you have chosen, including its history, record of success, any competitive advantages, and how it will help you build a successful business.
- Details of the opportunities you see for this franchise in your chosen area, the current market, competitors, and trends that could positively impact your individual franchise.
- Financial projections, including revenue, expenses, cash flow, and profitability one, two, and three years out.
- Management team. Details of experience and industry knowledge of those who will be running the franchise, obviously including yourself. If you have hired outside advisors with expertise, detail their qualifications and roles.
If you have done your franchise search with the proper diligence, you have already invested a significant amount of time and effort. Now you’ll want to put yourself in the best position to get the financing to realize your dream of franchise ownership, so be sure to compile and present the most complete loan package you can to “make the sale,” so to speak, and to help the process move along smoothly.