Packaging a loan request to finance a franchise

You don’t have to be a banker, a CPA, or even an accountant to package a loan request to finance a franchise, but if you haven’t packaged a loan request before, you probably won’t get the loan closed. Now is not the time to do-it-yourself!

But if you’re an entrepreneur, or even somewhat of an entrepreneur, it’s better not to tell you what you can and can’t do, including packaging a loan successfully. So I won’t tell you.

Instead, I’ll provide some information about what banks and the U.S. Small Business Administration (SBA) expect you to include in a franchise loan package, and then you can decide whether to do it yourself, or to seek assistance from a professional.

Chances are, you’re going to do both!

Preparing your loan package

Whether you apply for a microloan, a SBA guaranteed loan, or a traditional bank loan to buy a franchise, similar information is required to complete a loan package. The SBA Web site provides a detailed checklist of the required items. Here’s what the SBA says you’ll need to provide:

Loan Package Checklist:

Personal Financial Information:

• Personal Financial Statements
• Copies of Personal Tax Returns (including all schedules for 3 years)
• Source/Amount of Owner’s capital injection
• Credit Report for owners of 20% or more
• Resumes from Principals, Partners or Proprietors

Financial/Business Information:

• Business Plan
• Description/History of the Business
• Benefits from the loan
• Articles of Incorporation or Assumed Name Certificate
• Credit Report for the business and owners of 20% or more
• Cash Flow Projections
• Projected Profit and Loss
• Balance Sheet and Profit & Loss Statement
• Copies of Business Income Tax Returns (for 3 years)
• Copy of Existing Facility Lease(s) and/or Lease(s) to be acquired
• Schedule of All Business Term Debt (Notes, Contract & Leases Payable)
• Aged Accounts Receivable & Payable

Collateral Requirements:

• Schedule of Fixed Assets to be acquired with the loan and their cost
• Appraisal on real estate and most recent Tax Appraisals

That’s a lot of paperwork, but to buy a franchise still more paperwork is required. A franchisee’s loan package must include the Franchise Agreement and the Franchise Disclosure Document.

If you plan to borrow money for construction and leasehold improvements, then you’ll also need to provide a construction contract.

Is the underwriter franchise savvy?

Eventually (with some luck) your franchise loan package will be reviewed by a loan underwriter who will ultimately say “yes” or “no” to your request.

Whether or not you package the loan yourself, or you work with a professional, you (and your franchisor) must be willing to do some of the work the bank used to do to process a loan application.

Underwriters like to work in their comfort zones – which is generally not franchising (they’re used to more traditional business) – so you may have to educate them to get them to consider your request.

As a first step, underwriters may need to learn more about how franchising works before they’ll look at your loan package. Now’s a good time to introduce them to HowToBuyAFranchise.com and other quality sources that help people understand how franchising works.

You should also introduce them to the International Franchise Association (IFA) and ultimately to your franchisor. One of the quickest ways to educate underwriters about franchising is to get them to an IFA-sponsored franchise expo where they can also sit in on a variety of seminars.

The underwriter “proves up” the loan

The underwriter’s job is to make sure the lender has made the right assessment of risk and assigned the appropriate risk factors so that ultimately everyone wins – you get the loan, you pay back the loan, and the bank makes a profit.

Or, if the loan goes bad and the SBA guaranteed it, the SBA writes a check for 90% of the loan amount to help cover the lender’s loss.

Underwriters know what their rate of return should be if all goes well. What they don’t know is what’s missing!

They will spend the necessary time to figure out if the deal makes sense given the level of risk. The underwriter has to “prove up” the loan and, ultimately, if the loan goes bad, the lender has to prove to the SBA that it did an appropriate level of due diligence. Otherwise, the SBA may refuse to pay the guarantee.

“Proving up” the loan takes the mystery out of the lending process. It also takes time, usually two to four weeks, providing that the borrower included all of the required documentation in the loan package.

Develop your credit mindset

As you get started on your quest for a loan to buy a franchise, it helps to develop a credit mindset. Look at your loan package the way a lender will look at it.

Getting a business loan isn’t the same as getting a car loan, or even a mortgage. You may think, “I’ve never had a problem getting a mortgage in the past,” and while that may be true, it has no relationship to a request for a loan to start, acquire, or expand a business.

The questions are going to be different now because your proposed business may pose far greater risks to the lender.

You can’t have too much info

Be prepared to provide more information for a business loan than you did for a mortgage or a car loan. And you need to respond quickly to any lender request – a delayed response signals the lender that you may not be as passionate about your business as they’d like you to be.

Making matters worse, today’s lenders will not nursemaid you through the loan process. It’s fair to say that when it comes to business loans, you’re pretty much on your own.

But don’t take it personally. Underwriters are all about mitigating risk factors. They’re not looking for additional information and documentation from you because they want to find a reason to reject your loan proposal. They don’t need a reason to tell you “no”!

Be prepared to help the banker

They want to allay their fears about lending money to you, and you need to help them. They need to know more than the fact that you think the franchise is great, or that it’s ranked first in its industry.

They’ll want to know more about your experience, the operational and financial strengths of the franchisor, and the viability of the product or service in the market where you will operate a franchise.

Help them! It’s in your best interests when you’re looking to buy a franchise.

Make it clear you’ve done your homework

Bankers and other lenders may understand why people want to buy franchises, but that doesn’t mean you won’t be expected to demonstrate that you understand why you’re buying a franchise and how you’re going to operate the franchise.

Robert Coleman of Coleman Publishing, a business that provides information to small business lenders, says, “I would encourage a person who’s looking for a franchise loan to go to the Small Business Development Center (SBDC) at their local college and take some basic classes.”

Whether or not you work with a professional to package your franchise loan, Coleman points out the importance of making sure “you can tell the banker that you understand the market for your franchise, you understand the location – why it’s on this particular corner and not another corner, and why that’s attractive.”

In other words, if you don’t work with a professional advisor, you’ve got to be able to defend your loan package on your own.

“Show the banker that you’ve done your homework,” says Coleman. “Make it clear that you’ve talked to the other franchisees in your area and across the country. Show the banker that you understand why the top ten franchisees are in the top ten, and why the bottom ten are at the bottom.”

Who loans to franchisees?

Since the early 2000s, there’s no longer a national franchise lender in the United States, but many banks, including community banks, favor franchising and may want to consider your loan application.

Your franchisor may be the best source of information about receptive franchise lenders, but you can also call banks and ask about their interests. Coleman points out that more community banks are lending to franchisees these days.

Today, lenders want everything in a neat box, and who can blame them? You go outside of that box and the answer to your loan request will be “no”. So make certain that you follow the procedures.

How much time does this take?

A good franchise loan package will require at least several weeks to compile. Submitted to the right lender, the loan could be underwritten and approved in as little as two weeks.

Practically speaking, most loan packages are not submitted to the right lender, and they’re not complete. Consequently the loan process takes much longer.

The length of time depends on many variables, including:

• Quality of the loan package
• Strength of the borrower
• The franchisor’s performance
• The underwriter: some are better organized than others
• The borrower: some are less cooperative, or slower to provide needed documents
• SBA approval

Underwriters are under pressure to perform quickly because no one gets paid until the underwriters complete their work. Banks want to lend money because that’s how they make money, but today they have more checks and balances to complete than ever in the past.

A reasonable target for getting a loan funded (after submitting a quality loan package) is six to eight weeks. You, the prospective borrower, can help speed up the process by providing all of the information required in a neat package, and then respond quickly to the lender’s requests.

Can you do this all alone?

Unless you’ve got experience packaging loans (which means you’re probably not reading this article), you probably cannot succeed working alone today. And if you do, you’ll likely add weeks if not months to the process, which delays the point at which you can buy a franchise.

Getting a professional to help you may be a necessity. Many professionals are available to assist you and you can find them by asking franchisors and franchisees for their recommendations, and by reviewing the Supplier Section of the IFA. You’ll also find professional advisors at franchise expos.

Categorised in: Financing

This post was written by Dr. John Hayes