Business Loan Basics for Potential Franchisees

Obtaining finance to purchase a business has never been tougher.  Understanding the requirements of lenders and accommodating these requirements will increasing a borrower’s chances of obtaining finance.

There are number of considerations a lender will take into account in determining whether to approve a business loan.

Greenfield v Established

Buying an established business gives you more lending opportunities than buying a greenfield site.  A greenfield is where you are starting the business from scratch, there is no prior trading history and your financial information relating to the business is projections and forecasts, rather than factual data.

An established business is where you are buying a business which is currently being operated by another franchisee who is selling that business.  When purchasing an established business there is actual data on the trading history of that business as well as infrastructure, staffing, processes, a client base and so on which makes the risk far more attractive to a lender.

Lenders much prefer to lend for the purchase of an established business rather than a greenfield because they have real data to assist them in assessing the business opportunity.

Industry

Certain industries undergo varying levels of scrutiny from lenders when evaluating funding opportunities. Sectors like beauty, hospitality, and fitness, which are prominently featured in the franchise sector, often face increased caution from lenders. Banks assess both the brand and the industry, favoring sectors less susceptible to economic volatility. During downturns, lenders may hesitate to heavily finance industries reliant on discretionary spending.

Securing financing for businesses can indeed be challenging. However, franchisees can enhance their chances of securing funding by addressing these concerns with mitigating factors. For instance, in the print industry, there exists an unfounded perception of decline, whereas certain segments are actually experiencing growth. Providing lenders with factual insights can demonstrate the robust aspects of the industry and present your franchise investment in a favorable light.

Mitigants

Mitigants are elements that reduce the risks to lenders. Some of the mitigants lenders will look for include:

• Do you have prior experience in running a business? 
• Can you display financial acumen?
• Do you have prior experience in the industry you are looking to buy into?
• Do you have a strong asset position?
• Are your personal finances in order?
• Have you completed due diligence with legal, financial and accounting advice?
• Do you have a business plan and cash flow?

Due diligence

Lenders like to see that as a prospective business owner you have completed a reasonable amount of due diligence.  This includes writing a business plan, providing an analysis of previous financial data (if available) and providing financial and sales forecasts.  You need to be able to display to the lenders that you know what you are doing, you have a plan in place regarding how you will operate the business, you have considered risks and offered mitigants and you have a clear understanding of financial implications of business performance.

Standard lending requirements

There is of course the standard lending criteria which lenders will apply to your loan application.  Do you have sufficient capital or equity behind you, do you have collateral to offer if required, can you evidence that the business can service the loan, are you willing offer personal guarantees if requested. Lenders will apply credit criteria and go through their series of calculations to assess if they will lend you money.  You can play a vital role in this process by having financial information readily available.  Lender get concerned if borrowers are disorganised.  It is always a good idea to have a “lender pack” ready with everything that may be required for the loan, including a copy of your franchise agreement where possible (even if it is just a template version, not the executable version).

Personal Financial Situation

Your personal financial position will also likely be considered when applying for business finance.  Your lender may ask the following questions:

• What are your personal debts? For example home loan, investment property loan, credit cards, car loans and so on
• What are your living expenses? This includes how much you spend on groceries, utilities, school fees, insurances and so on
• How will you pay for these expenses while your business builds?
• Is there going to be another source of income into the household?  Such as do you have a partner who will continue to work, do you have investment income and so on

It is highly recommended that you go into your meeting with your lender with a document breakdown of your personal assets, liabilities and living expenses

Lenders are asking for more information than ever before to assess whether they will lend you money to buy a business (or for any purpose really) so preparation is key.  Making it easier for the lender by being prepared means you are making it easier for the lender to say YES!