If you’re considering franchise business ownership, one of the first questions you must ask yourself–along with, of course, which franchise brand you select–is how you’ll finance your business opening and operations. One of the great things about starting with a franchise system like D.P. Dough is you’ll have a systematic, predictable cash flow to fund your operations once you get open. But you’ll still have to find the funds to get your business up and running before you can start relying on those cash flows.
This is the first in a series of posts where we’ll discuss the ins and outs of financing your franchise business. As it is likely that most franchisees will not be paying the start-up costs in 100% equity (i.e. cold hard cash), we thought it best to start by talking about the world of business lending–let’s talk about getting a loan!
Business loans, technically speaking, aren’t that different from conventional consumer loans, like the kind you get to buy a house or finance the purchase of a car. There are some important differences, however, that are important to understand before you sign the dotted line. Let’s talk about your options.
First, most banks and credit unions will offer conventional business loans to people seeking to start or buy businesses. These banks hold on to the paper backing these loans, and are, in essence, betting that you will not default on your note and will pay them back with interest. They hold the risk, so expect your local banker to be especially stringent in approving your loan.
As a result, the single most important issue in getting conventional bank financing is your credit rating. You will need to present a complete loan package including a personal financial statement, copies of personal tax returns for three years, and proof of the source of your down payment. Banks will almost always require collateral on the loans they provided to small businesses, so be prepared to secure your loan with personal assets and a signed personal guarantee that you’ll repay the loan in full. Even with assigned collateral, be prepared to put down at least 20% of your initial start-up costs as a down payment.
Even if you can meet all the requirements listed above, you still might have a tough time getting a conventional business loan. Most of these loans go to borrowers who have established relationships with a banker or previous experience industry experience.
If you do get approved for a conventional business loan, be prepared for different terms then you might expect with consumer loans. Typical term length can range from 3 to 10 years. Rates can be fixed or floating, though they are typically tied to the prime rate.
But what if you don’t have the right connections or experience to make a conventional business loan happen? We’ll cover that in our next post in this series when we discuss loans that our backed by the U.S. Small Business Administration (SBA).