What is the real deal about small business loans for start-up franchises? Are lenders lending, or are they, like most Americans, holding on to their money?
If you have made the decision to get into a franchise business of your own, have completed your research, and are about to start writing your business plan to present to a bank, what are your chances of actually getting a business loan?
I asked Don Johnson, the President of Diamond Financial, 5 really important questions concerning the availability of small business/franchise loans. His answers may help you feel better about your own prospects for getting funded.
The Franchise King:
I keep hearing that lenders are just not lending. What are the facts?
Are their any specific types of lenders that just not parting with
their money?
Don: Although SBA lenders have tightened up their lending considerably the last 6 months, loans are still getting funded. The key is to know which lenders (bank & non-bank) who are and what their credit “box” or loan criteria is. What else is crucial to loan approval is in the structure and packaging of the loan. Lenders are asking more questions and making sure all aspects of the loan are explained in detail. Having a loan packaging specialist, who works closely with aggressive business and franchising lending services can maximize loan approval ratio. Lately more local and regional lenders (SBA) being more aggressive than the national lenders.
The Franchise King: Should prospective franchise owners plan on coming up with bigger down payments than before this debacle?
Don: Yes, Higher down payments (usually 30% on a start up business), more cash reserve money (3+ months personal expenses after down payment), higher credit scores (680+), experience and collateral (at least 50% of the loan size) are all being more closely monitored. Business acquisitions require less down payment money but experience is more important.
The Franchise King: Is the SBA looking at franchise start-up loans differently?
Don: Franchise start-up loans have been tougher. Lenders are looking more closely at the debt to income ratios, history and default rate of the franchise system, how well the industry is doing and even looking at their own loan portfolio to see if lending in certain states is an issue. Since franchise start-up loans (less risky than a non-franchise start-up but riskier than real estate, expansion or acquisition loans) need time to become profitable, lenders want to be sure borrowers have another source of outside income and plenty of reserve during the new owner transition.
The Franchise King: Are there any specific franchise categories that lenders are looking more closely at?
Don: Lenders are being even further conservative with food franchises, newer franchisor companies, and ones that have had some problems with franchisees who have failed or defaulted on their loan. Usually higher collateral, direct industry experience, higher net worth and more liquid cash reserve money will be needed to invest in this type of franchise during these times. Food franchises, which make up a high percentage of all franchises, usually will have a higher failure rate during an economic slow down period, which is why lenders will be more careful on their lending policy.
The Franchise King: How can your company help prospective franchise owners in these trying times?
Don: Diamond
Financial Services, a nationally known business finance consulting
company (with a specialty in franchise lending) helps prospective
franchisees by initially pre-qualifying them and discussing their loan
potential. We then custom design and completely package the loan and
prepare it for lender review. We maximize chance of loan approval, get
better loan terms, manage and coordinate the process with the lender
and simply make it faster and easier. We can also protect assets and
put together a short and long term growth strategy for a
borrower/franchisees future lending needs. Also, Diamond Financial
understands the lender’s guidelines, what each lenders “hot points”
are, and will always be on top of whatever lender or SBA changes.
Thank you so much, Don!
Well, I feel a little better. Do You?
What are your experiences with obtaining business loans? Please share them, below.
Anyone interested in a no-cost consultation to discuss their loan potential and pre-qualification, can call Don Johnson at 877-508-2274 or don@easysba.com
Don also is the co-host of Franchise Interviews, a radio show broadcast every Thursday morning. Right here.
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