More Self-Scrutiny: Your Credit Rating

There are three common ingredients that all potential lenders look for in a credit rating: Stability, income and track record. Do you fit the bill?


More Self-Scrutiny: Your Credit Rating

What lenders are looking at

Most lenders are interested in how long you’ve been at a certain job or lived in the same location, and whether you have a record of finishing what you start. If your past record doesn’t show a history of stability, then be prepared with good explanations.

Not only is the amount of income you earn important but so is your ability to live within that income.

Related: Main Challenges Facing Franchisees

Most lending institutions look at your income and the way you live within that income for one very good reason. If you can’t manage personal finances, the odds against you being able to manage your business finances are very good.

The third element lenders look for is your track record — how successful you’ve been in paying off past obligations. If you have a record of delinquent payments, repossessions and so on, you should get these squared up before asking for a loan.

Most lenders will contact a credit bureau to look at your credit file. We suggest you do the same thing before you try to borrow. Once you have this tool, you should correct any wrong information or at least make sure your side of the story is on record.

Be informed

There are infinite sources of financing available to help you launch the franchise of your dreams. However, operating a franchise with no reserves and blinding yourself to unexpected business problems can lead to disaster.

A good rule to remember: Never invest more than 75% of your cash reserves.

Example: If you have R40 000, invest R30 000. If you have R750 000, invest R562 500.

More important, remember that the price of a franchise doesn’t always reflect the actual cost of the business itself. Additional costs can include down payments on the land, building, equipment, fixtures and signs, and can cover inventory, leasehold improvements, training, opening promotional costs, administrative costs and even sales commissions.

15 franchise financing tips

  1. Talk to your franchisor before searching for outside financing; get approved or pre-qualified.
  2. The most common source of start-up capital is friends and family. Use them.
  3. Seek out lenders that understand not just business but also franchising.
  4. Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.
  5. Neatness counts. Fill out your credit and loan applications clearly. Typed is better.
  6. Don’t weigh down your loan application with attached documents.
  7. Don’t exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.
  8. If you lack liquidity, find a partner with money.
  9. Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.
  10. Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt.
  11. Consider buying used equipment, furniture, vehicles, etc.
  12. Do Internet research before wasting time, energy, fuel and phone calls. You’ll find useful information. Some sites even allow you to file loan applications online.
  13. Don’t overlook angel investors and venture capitalists.
  14. Avoid dipping into your retirement money or your kids’ university funds. Any start-up — even a franchise — is a risk.
  15. Don’t give up!

Related: Landing On Your Feet

What’s your rating?

There are four main credit bureaus in South Africa. You can get a free report from one of the below:

Franchise Zone
About the Author
Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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