Aspiring franchise owners know the path to ownership can come with many disappointments. Few, though, are as heartbreaking as this: ’I’m sorry to be the bearer of bad news, but your business loan has been turned down.‘
Loan turndowns can still happen even when you’ve got the green light from the franchisor. Fortunately there are some steps you can take to make sure you don’t get a surprise rejection that puts a spanner in the works of your franchise dream.
Make sure your franchise fits
If you’d like to avoid hearing your lender verbalise what is a really depressing sentence, start off by finding the right franchise to buy.
I know that sounds simple, but if the lender doesn’t feel that it’s a good fit for you, or a proven concept, you probably won’t get your loan approved.
You should investigate several franchise opportunities before you find one or two that could turn out to be a good fit. A good fit in a franchise consists of a business that will allow you to use your top skills, is a nice match for your dominant personal traits, fits well within your budget, and makes sense for your geographical location.
Sometimes finding a good fit is an arduous process, but that’s okay because you (and your own slice of unencumbered capital) are worth it. Take all the time you need to find a franchise business opportunity that fits you — and fits what you want in a business.
Once you’ve found that franchise, the real work begins. And while this work may not be as exciting as your search for a franchise was, it’s important for you to put a serious amount of effort into it.
That’s because it can determine whether or not you’ll actually be able to open the franchise that you’ve decided on.
Have a solid business plan
You must draw up a formal and solid business plan. Don’t cut corners and get someone else to write it for you unless you know what every sentence in it means.
Tim Berry, who’s known as ’The Father of Business Planning‘ and the creator of best-selling business plan software says this:
“You need a business plan if you’re applying for a business loan. Most banks require it, and even lenders that don’t strictly require it expect it. They expect it to be a summary of the business with some predictable key points.”
Your business plan can’t only consist of facts and figures though. You need it to tell a story. You need to make it persuasive. Remember who your audience is and what it is they want.
Think about the kinds of institutions you’re applying to as well as who their underwriters are. They want to be able to sleep at night if they approve your loan. Your business plan needs to be designed to do just that.
Check your personal credit
A great business plan won’t be able to erase poor personal credit. That’s why it’s important for you to check your credit rating before you embark on your franchise ownership journey.
Once a year, you can request a free credit report. Once you’ve received your report, make sure that everything listed is accurate. If you find any mistakes, contact the creditor and ask for a letter stating that a mistake has been made. Keep it on file and make sure that the creditor informs all the major credit bureaus.
Even franchises require a business plan. These are the bits you should never skip.
A business plan isn’t just important for a start-up, it’s equally important for franchised businesses.
The discipline for preparing the business plan forces you to consider questions about the challenges you’ll face and the expectations you have for your new business. If you’re seeking finance from a third party, your business plan is probably the first document they will ask for.
A franchise business plan is substantially easier to write because the franchisor has a great deal of information on hand for you to use. Nevertheless, make sure your business plan includes the following sections:
- Introduction. A complete description of the business, including products or services, the size and competitive nature of the market, the operational approach to take the business to market, and challenges and risks.
- Management. A description of key management roles, including names and experience of the people who will fill these roles.
- Marketing. Explanation of how you’re going to attract customers. This includes explanation of the competitive advantage of the business, how the product or service relates to customers, and detailed marketing and advertising plans.
- Financial projections. Income statements, cash flow statements and balance sheets that project the anticipated financial performance of the business when it begins operation. These projections should always be conservative since it’s not possible to predict unexpected delays or challenges.
- Financial needs. Regardless of the source of funding, you should include a complete analysis of all start-up costs related to financing needs, including sufficient working capital to cover initial marketing plans and operating losses until break-even is reached.
The little extras
Some franchises require prospective franchisees to begin work or substantially complete their business plans prior to being approved as new franchisees in the system.
In doing this, you’ll typically identify questions that you can ask the franchisor to clarify your understanding before making a final decision to proceed with the franchise.
Carefully review and update your business plan fully after completing the franchisor’s initial training. You will understand the business better post-training, and be more prepared by the time you visit the bank.