There are a number of steps that a prospective franchisee will need to take when setting out to obtain franchise finance, including being able to demonstrate a clear financial strategy, a thorough business plan, and an ability to manage any necessary loan repayments while developing the business.
Following a tried and tested process, and speaking to your accountant or financial advisor for further guidance, will greatly improve your chances of a loan approval, helping to secure your business the funding it needs to achieve your franchise objectives. To go further into the subject, below we’ll break down the process, and try to explain why each step is important for loan application success.
Assess Your Financial Readiness:
To begin with, and most importantly before you start your application for franchise finance, you should evaluate your business finances, and if necessary, personal ones too, as lenders will need to assess your credit history and any existing debts, as well as your overall financial stability before considering loan options. A strong credit score, either personal if you are just setting up, or business if you are already established, will improve your chances of securing funding, and the better your score, the lower your interest rates will be.
Determining the Right Financing Option:
Once you’ve made your assessments, have a thorough understanding of your financial position, and have the right documents ready to present to a prospective lender, your next step will be to do your due diligence on the different financing options currently on the market. Traditional business loans from banks are a common choice, though they often come with strict eligibility requirements and longer approval times, and can be particularly difficult to secure if your credit score isn’t optimal. Franchise specific loans are also available, offered by lenders who specialise in franchise financing, and firms who can provide more tailored solutions with better terms to suit your needs.
Research and Choose the Right Lender:
Not all lenders offer financing that is purely directed at franchisees, though the reasons for your loan may be more generic than something solely related to establishing or expanding a franchise, for example for maintenance or cash flow issues. This is why it’s important to do your due diligence and research different financial institutions so you can apply for the most suitable loan that will have the best terms and interest rates. Also, remember that if it is specifically related to your franchise, some lenders have pre-approved franchise lists which will make it much easier to obtain funding, and again is why it’s so important to do your research before approaching a lender.
By speaking to your financial advisor and discussing comparable interest rates, repayment terms, and loan conditions across multiple lenders, you will have a much better chance of finding the best financial option for your business, increasing your chances of long term success and accessing the funds you need for further growth.
Gather Any Required Documentation:
Being well prepared will be appreciated by any lender, and generally increase the speed through which your loan is approved. In the case of lenders like us here at Nucleus Commercial Finance, we use Open Banking to assess our applications and consider loan approval. With that said, a well prepared loan application should include any of the necessary documentation that will support your loan request.
In a typical case, lenders will expect financial statements, tax returns, proof of income, and personal identification, and if you already own a business, you will also be required to provide your balance sheets and profit and loss statements for further financial scrutiny. Franchise specific documents typically include a Franchise Disclosure Document, or FDD and your franchise agreement which should also be presented to provide lenders with an understanding of your franchise model.
Submitting Your Application:
Once you are satisfied that your application is ready, submitting it to the chosen lender will be the next step. Depending on the loan type you are seeking and lender’s method of approval, the process could take anywhere from a few hours, to several weeks, with traditional lenders tending to be the most prolonged, typically requiring signed documentation and other requirements to be met via an online portal. During this time you should expect lenders to request additional information or make clarifications on certain aspects of your application, so having your documents in order in both physical and digital form will ensure you can answer any additional queries quickly to keep your application on track for approval.
Review and Finalise Loan Terms Before Accepting:
If your application ends up being successful, and you are offered a loan, you should still carefully review the terms before signing, and certainly run them past your accountant to get a second opinion on the overall agreement. Pay close attention to the interest rate, repayment schedule, and any additional fees that may not have been in the initial loan you applied for, and it is also worth noting that some loans have early repayment penalties or hidden charges that could further impact your financial planning.
In the case that you have applied to numerous lenders and you end up receiving multiple loan offers, you should compare each lender’s terms side by side to help you make an informed decision, and get committed to the best possible loan on the market for your business needs.