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Franchise Prospector » Money & Financing
Financing for a Franchise Business
How to Get a Small Business Loan
by AMY COVINGTON
Big Pond, Little Fish; What Attracts Small Business Lenders to Applicants among the Sea of Competition
In 2002, the SBA reported 22.9 million businesses were operating in the United States, and the number of franchises popping up is growing steadily. We've all seen restaurants and stores practically going up overnight. It's evident that you are not alone in your desire to start a franchise, nor are you alone in seeking financing. With so much competition, how does one stand out from all the other entrepreneurial spirits?
Industry experts have differing opinions on how to enter the loan process, but all seem to concur that the key to success is through a solid business plan. Your plan should provide a comprehensive business overview, including what you plan to sell, how you will acquire, produce or manufacture your goods, all costs, who will man your store and how much it will cost to pay them, as well as when you anticipate recouping your initial investment. Your plan must include a total dollar amount that will cover all the bases outlined.
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The Small Business Association recommends the following essential elements to your loan presentation:
- Business profile. A document describing type of business, annual sales, number of employees, length of time in business and ownership.
- Loan request. A description of how loan funds will be used. Should include purpose, amount and type of loan.
- Collateral. Description of collateral offered to secure the loan, including equity in the business, borrowed funds and available cash.
- Business financial statements. Complete financial statements for the past three years and current interim financial statements.
- Personal financial statements. Statements of owners, partners, officers and stockholders owning 20% or more of the business.
For many lenders, your personal financial statements weigh the heaviest in the money granting process, so ensuring their accuracy is in your best interest. The SBA declares the following documents as the most important:
- Balance sheets from the last three fiscal year-ends.
- Income statements revealing your business profits or losses for the last three years.
- Cash flow projections indicating how much cash you expect to generate to repay the loan.
- Accounts receivable and "payable aging," breaking your receivables and payables in to 30-, 60-, 90- and past 90-day old categories.
- Personal financial statements from you and your business partners listing all personal assets, liabilities and monthly payments, as well as your personal tax returns for the past three years.
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In addition to having your paperwork in order, lenders look for applicants to have a reasonable amount vested in their respective businesses. Lenders analyze your debt (how much money you are asking to borrow)-to-worth (how much money you have invested in your business) ratio to determine whether or not you are a worthwhile risk. According to the SBA, strong equity candidates with a manageable debt level are more likely to operate financially stable businesses-meaning during times of operational adversity the business has a better chance of staying afloat. Applicants with little or no equity present a high risk to lenders, as the recovery rate on a defaulted loan is much lower than a strong equity borrower.
Rick Anderson, General Manager of Little Rock, Ark.-based Franchise Finance and former chair of the International Franchise Association, agrees. "Someone who wants to borrow working capital is a weaker candidate," Anderson said. "It helps to have home equity but net worth is not as big of a deal as it used to be. Now, it's not necessarily how high your net worth is, but what it consists of. In the past, applicants needed one and a half times [in assets] over what they wanted to borrow." Ideally, prospective franchisees should have 20-30 percent in cash or available, non-borrowed, funds when approaching a lender, Anderson advised. Trends indicate that more lenders are looking at the bigger picture during the lending process. Even though lenders are not as staunch over the amount of collateral, candidates with strong collateral almost always are favored.
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