The last two years have been challenging ones for people looking to get small business loans. It would be great if future entrepreneurs could have a bit more leverage when it comes to asking the banks for some of their money.
For example, the SBA allows banks to leverage their money…..but it doesn’t seem to be enough. Yet.
My friend Thursday Bram, in her first guest post (for Credit Score) on The Franchise King Blog, brings up something you may be able to actually use for leverage as you try to get your franchise business financed.
In an ideal world, you’d choose the perfect franchise, write a check and be in business tomorrow. But the process of becoming a franchise owner is rarely that simple…..
Both sides have an interest in making sure that a franchise will be as successful as possible — and if you need a loan to be able to afford the franchising fee, there’s a third party interested in your ability to make the business profitable. That means that a careful examination of your finances is almost certainly going to be on the table.
Reassuring the Franchise of Your Abilities
The simple truth is that it is difficult to tell who is going to be a good business owner and who isn’t, especially when the people in question may not have any experience with owning a business before. Many franchises use credit scores as a way to make sure that a new franchise owner can at least manage her own finances before she is required to run a business. More than a few franchises expect you to have a credit score above 700 (considered a high score) in order even fill out the paperwork. Furthermore, it’s a rare business that starts bringing in cash the first day it opens. As the owner, you may have to bolster your franchise’s finances, at least to start with, and your credit history is a good way to judge if you’ll be able to either do it on your own or get a business loan.
Success in the Lending Market
Lenders have had a bumpy road over the past few years, leading to tightened requirements for getting a loan. Even if you aren’t relying on a loan to get you set up with a franchise, it’s useful to have a line of credit for your business to insure that you’re always able to handle what comes at you. Because lenders want to see evidence of past performance before making a decision one way or another, they’re going to look at your credit score — as well as the performance of other units in the franchise. With a new business, that’s as close as they can come to getting a clear picture of exactly how you’re going to be able to perform. That’s your personal credit score, by the way, which means that you need to do everything within your power to make sure that your credit history is clean long before you actually need to borrow money since it takes up to seven years for a bad financial decision to be far enough in the past that lenders won’t look at it.
So get that credit score up before you’re ready to move ahead with buying a franchise — having it in place ahead of time is crucial.
(Thursday Bram writes for creditscore.net)