Thursday, April 27, 2006

Getting a bank loan for your franchise business

Thinking of Getting a Bank Loan for your franchise business? Do Your Homework First!

If you are a start-up entrepreneur, getting a bank loan for your business is like going through the needle. It is tough, but not totally impossible. You just need to do your homework well. Here are the kinds of preparation you need to do to increase the chances of getting that bank loan approved.

Borrowing to start a business is not easy. Getting a bank loan, particularly for a start-up franchise business and a newbie entrepreneur, is like going through the needle. More so if your business is home-based and on the Internet. Banks favor an established business person with a solid credit rating, a sizeable bank account, experience in the business they propose to enter, and business plans that show the ability to repay the loans. If you are not one, then you need to double your preparations to convince the banker to lend you that much needed start-up capital. If your business is a start-up, bankers will need to know as much as possible about you and your business. Lenders will ask for an awful lot of questions, and it takes a great deal of work to put it all together.

However, many small franchise business owners often make the mistake of not being adequately prepared when going to the bank to the loan. Surprisingly, many loan applicants don't even have the slightest idea how or when they intend to repay the money they requested. Often they don't even know how much money they need. When asked how much money they want to borrow, many people give these two common responses: "How much money can I get?" and "As much as possible." Is it any wonder that lenders say no?

The bottom line is that it pays to do your homework before you ask for a loan. Bear in mind that the probability of getting your loan approved goes up if the degree of risk associated with lending you money goes down. To lower your risk and improve your odds of getting the loan, you need to anticipate the question lenders will ask you. You need to present your banker insights into your business that may enable him or her to easily approve your loan. For example, prior to filling out a loan application, you should know:

  1. Exactly how much money you need? Be as exact as possible, adding a little for contingencies and the unforeseen extra expenses.
  2. How you plan to use the money? Telling the banker that you want a loan to "have working capital" to the fastest way for your loan to be denied. There are only three things you can do with a loan - to buy new assets, pay off old debts, or to pay for operating expenses. Be specific as possible.
  3. How long it will take you to repay the loan? Your cash flow projections will help you formulate a repayment time frame for the loan. This is the time when you need to convince the banker of the good potential of your business and its long-term profitability.
  4. What rate of interest rate can you afford? There is no sense in tying yourself up in a loan that will squeeze out your profits and bleed your franchise business dry. It does not benefit you to take on debt that cannot be repaid.
  5. What can you use as security for the loan? A loan is a risk, and the bank needs to make sure that they can get their money back. You need to present your personal guarantee to repay the loan and collateral. Your goal is to convince the banker of the value of your collateral.

Of course, don't forget to present that all-important written business plan explaining in detail your business objectives, projected earnings for the next one to three years, marketing strategy, and other relevant information. Be sure your marketing strategies are outlined in detail to lend credence to your sales projections.

In addition to your business plan, you need to support your loan application with numbers - preferably good ones. Part of that homework is to gather the financial data that will enable you to prove to lenders that you are a good credit risk. In short, this entails putting together a credit history that includes the following:

  • Personal financial statement listing your assets and liabilities
  • A list of all credit cards and their current balances
  • All outstanding loans, including original balances, amounts outstanding, and current monthly payments
  • Total monthly mortgage or rent payments
  • Net monthly income from your home-based business, an outside job or other sources Checking and savings account balances
  • The value of your automobile(s), including original cost, balance owed, and current monthly payments
  • The current value of all property, including real estate, stocks and bonds

Getting a loan is going through a hard road. Bankers need to be sure that they are not taking inordinate risks with you. Your role as the loan applicant is to convince the bankers that you and your business are good credit risks.

About the Author:George Rodriguez is a staff writer of Power Homebiz Guides

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