Joel Libava
(Guest Post)
Owning a franchise is a heavy commitment, but one that can be immensely profitable if done well. For the fifth consecutive year, the International Franchise Association reports that the franchise business climate is improving, and the gap between what franchise owners need for capital – and what they can get – is decreasing.
Even with the positive trend, many franchise businesses still experience a shortfall; the IFA shares that the lending gap was about $1.3 billion in 2014 (the last year the study was done), leaving many franchise owners scrambling for additional cash.
One way to ensure your business doesn’t experience that gap of funds that owners need, but can’t access, is to present yourself as a stellar credit customer. While the steps to make yourself a desirable borrower are good habits for businesses of all kinds, franchisees need to make sure they cover all their bases.
With the average franchise costing between a few thousand dollars for a cleaning company to over $2 million for a popular fast-food chain, every bit of approved funding counts. That’s why you need to avoid the following mistakes.
Attention Franchise Owners! Stop Making These 5 Credit Mistakes
Here are the 5 credit mistakes you need to avoid.
- Not keeping an eye on your personal credit .
It’s a rookie error to think that the way you spend money in your personal life won’t affect your chances of getting funding for your business. Even if you have an established business credit history, many lenders will check your personal credit to see that you pay back loans on time.
You may even be asked to put up personal collateral to push that loan approval through. Never take your personal spending and saving patterns for granted, and keep a careful eye on those in your personal life who have access to your funds, credit lines, and sensitive information.
Pro tip: Treat your personal money matters like a business. Give the same care to tracking expenses, balancing a budget, and paying down debt as you would with your company. Monitor your personal credit scores to make sure they stay strong. (Here are 150+ places to monitor your credit scores for free.)
- Not keeping tabs on your business credit.
Did you know your franchise business can have its own business credit score? And that anyone can check your business credit, without your knowledge or permission? Research by Nav found that business owners who understand their business credit were 41% more likely to be approved for a business loan.
You never know when your business credit may be used to evaluate you for financing or other opportunities; you want to make sure your business credit is strong and will help your business grow rather than hold it back.
Pro tip: Business credit reports may contain mistakes, and franchise businesses in particular may find their credit details mixed up with that of another similar business in a nearby location. Checking and monitoring your business credit reports is the only way to ensure yours are correct. You can check, build and monitor your business credit for free at Nav.com.
Good Credit Matters
- Thinking that good credit only matters if you borrow
Beyond lending, there are several ways business credit may be used. If you need any kind of commercial insurance, the insurer may review your business credit; bad credit may result in a higher rate, or your application may be rejected. Want to tap into the lucrative government contracting market? Federal, state and local government contracts will currently often require a surety bond — which often involves a business credit check. Finally, vendors or suppliers may offer you payment terms that can improve your cash flow; but they will often check business credit first.
Pro tip: Build business credit before you need it. It takes months to establish business credit and may take a year or more to earn a high business credit score.
- Using the Wrong Cards
Business debit cards may be a convenient way to pay for purchases, but they can be risky. A crook who gets a hold of your card number can quickly drain your account, leaving you with no access to funds you need to pay bills. And unlike business credit cards, debit cards are not covered by federal law if they are used fraudulently. (Your issuer may offer zero liability, but it may take a while for funds to be put back in your account.)
While using a personal credit card may be convenient, the right business credit card can help you effectively separate your business and personal credit, and can help you build business credit. Perhaps more importantly, business credit cards do offer protection if your card is used fraudulently; you can’t be held responsible for more than $50 in fraudulent charges.
Pro tip: When choosing a business credit card, take time to understand how which business credit cards report to your personal credit, and explore which business credit cards help build business credit.
- Settling for fast financing
There are dozens of different financing options available to small business owners. Your franchisor may offer financing but you may also be able anything from an online term loan or line of credit to a merchant cash advance if you accept credit cards from customers. When you’re busy running your business and putting out fires, getting financing that’s fast and easy may win out over financing that requires more time and effort.
It’s easy to wind up with financing that looks cheap — a 1.4 factor rate, for example — but that turns out to be expensive, with an equivalent Annual Percentage Rate (APR) of 35% or more!
Pro tip: When comparing financing offers, use a free business calculator to translate the cost to an APR. This will make it easier to compare costs among multiple offers, and to make sure you understand what you’re really paying.
The IFA predicted a $451 billion contribution to the U.S. GDP in 2018 – or approximately 3% of total. With franchisees having a significant opportunity to add to the national economy, the time is right to take your credit standing seriously and achieve new funding opportunities for continued growth and prosperity.
(Credit expert Gerri Detweiler is education director for Nav, which provides business owners with simple tools to build strong business credit and helps them find financing. She’s been interviewed in more than 3500 news stories and answered over 10,000 credit questions online. Her articles have been widely syndicated, and she is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has hosted her own radio show and testified before Congress on consumer credit legislation.)
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