If you run any type of business, chances are you will likely need to borrow money at some point. You may need financing to get your small business off the ground or to expand an established one. For franchisees, loans are typically used by those who are entering the industry for the first time, need funds to enhance their units, or want to add additional locations.
There are a number of alternative lending sources that provide loans for franchisees, but banks are still a very common route to go. But before you head to the bank, it may be a good idea to take a step back and look at your financial state. Banks look at a number of factors to judge risk in approving a loan and it’s beneficial to understand why they may deny franchisees. Jeremy Ames, co-founder and president of Guidant Financial, shared with us a few things banks are always on the lookout for and why they may stamp “deny” on a loan application.
Not Having a Backup Plan
Whether you are a first time franchisee or looking to add additional units, thorough research is required. Getting all your proper documents situated and a bank picked out will help streamline the process. During this preparation process, it is important to have a few banks in mind. Ames said a common bump in the road is not having a backup plan.
“People tend to approach banks in a linear fashion and will only talk to one source. They could be dead set with talking to one bank, think they have everything in order and they could get weeks into the process and find out something didn’t work out with the application,” Ames said. “This can be a major roadblock for franchisees and starting over can be time consuming and affect future loan approval.”
Making Major Life Decisions
Getting a business off the ground can take up a good portion of one’s time. You can still have a life while searching for a loan, but Ames recommends to not making any rash decisions during the preparation and approval process. Purchasing a home, quitting a job or making other major life decisions could impede the loan process. A bank may not entrust someone with a business loan whose time is occupied with a new home or job searching.
Type of Industry Entering
While banks may not deny a loan just because someone is a first-time franchisee, they look at the factors surrounding an entrepreneur's choice to go into the industry. Ames said that banks will look at the industry a possible borrower is getting into. Franchising, even with its proven and successful business model, may not give borrowers a green light for a loan. Ames went on to say specific industries, such as quick service restaurants with numerous locations and a speedy business model, might give banks peace of mind.
Ability to Repay
Whether you are new to the industry or are a seasoned veteran, Ames said the prime thing banks look at when approving the loan is if the borrower can repay the loan.
“In my experience, banks really look at one thing and that is the ability to repay. They will look at a number of things to analyze if the borrower can repay such as collateral and debt-to-income ratio,” Ames said. “The biggest misconception about banks is that they are thought of as equity lenders. Banks will look at a business in evaluating risk, and if they borrower seems like a good bet they will approve the loan.”