Buying A Franchise - What You and Your Lender Should Expect

It’s a matter of chemistry – and cash.

The choice of a concept or franchisor that you like and feel you can work well with is of paramount importance as you make the decision to open your first Franchise operation. The chemistry has to work.

Nearly as important, though, is your choice for another new business relationship: the one with a lender who will supply the financing for your venture. The lender has the cash you’ll need to buy the business, launch it, and grow it.

Franchise financing is a highly specialized field – so much so that most major franchisors have a list of lenders with the experience and skill to create the package most likely to ensure your success. In order for the lending relationship to flourish, you must understand the answers to two fundamental questions: What should I expect from a franchise lender? What should the lender expect from me?

Let me suggest the answers to both questions for you.

What should I expect from the lender?

1. Expect a “yes” to this question: “Is my lender really a lender?”

Too often, what you think is a "lender" is really a middleman, a broker, who has no authority to approve your deal and no capital to fund it. If you use a broker, be aware that the broker will send your deal to several lenders hoping that one will approve it. If the real lender has questions, the broker (not you) will provide answers. In the meantime you lose the opportunity to explain your plans directly to someone who can actually approve and fund your project. Further, the broker could add his/her commission to the funding, thereby increasing your costs.

2. Your lender should have a commitment to the franchise business.

This usually means the lender has a program specifically designed for franchisees, and the lender has allocated sufficient resources to provide prompt, knowledgeable, and efficient service. The commitment should also mean that the lender is a long-term player in franchise finance – one who will be there to finance future locations as you grow your business.

3. Your lender should be knowledgeable about the franchise you have chosen.

Different franchisors have different requirements and expectations of their franchisees. A lender who is familiar with your chosen franchise – whether it’s a coffee concept, pizza, subs, ice cream, or another theme – will likely provide a faster, more efficient approval process and one that’s more comfortable for you.

4. Your lender should ask you specific questions right upfront to see if you qualify for its program.

5. Your lender should provide a complete list of the information it needs to start the approval process.

6. Your lender should be committed to a fast approval process for your credit application.

Having a lender continually coming back to you for more information (and delaying its decision with Columbo-like “just one more thing” requests) is an infuriating situation, especially if the result is your not qualifying for the loan. That lender will have wasted your time. The process of starting your own business is hard enough without a lender who plays games with you. Ideally, you provide the information the lender needs, and the lender approves or declines the deal – fast.

7. Your lender should explain the process for funding your transaction and should be able to answer all your questions readily.

You should expect openness and candor from your lender, and that means, at the very least, the lender needs to be able to explain its approval, documentation, settlement, disbursement process, and timetable in simple terms. The lender should also provide constant communication, fast answers, and frequent updates as you move through the process. You have need-to-know rights as a customer, and the lender has need-to-tell responsibility.

8. Your lender should honor all its commitments to you.

These commitments should be clear, specific, and in written form. Don’t settle for a vague “everything looks good” opinion.

9. Your lender should explain the reasons for declining your request.

10. Your lender should keep all communications and information concerning your account confidential and secure.

11. Your lender should retain your loan for its own account to make it easy to facilitate all future requests from you.

12. Your lender should be prompt, organized, and polite in all communications with you.

In short, the lender should be professional. Even if the lender is not going to do business with you, its representatives should be courteous and forthcoming. And if the lender is going to be working with you, honoring the commitments made during the “courtship” phase of your relationship should be a matter of course. An honest lender wants you to succeed – in fact, that’s the only way a lending organization will get its money back.

13. Your lender should stress the importance of keeping accurate financial records.

Of course, when a client keeps accurate financial records, that makes life easier for the lender. But it will also make life easier for you as well should you need to adjust your payments, acquire additional funding, or refinance your loan. Your franchisor will also want to make sure your finances are in order, so there’s another reason for a disciplined approach to record-keeping.

Well, if these 13 attributes are what you can expect from a lender, exactly what should the lender expect from you? Here’s that list:

1. You should present all information in an organized and readable format.

This means taking the time to fill out paperwork legibly. Many wise borrowers make copies of the blank forms and use these as drafts on which they’ll make their mistakes and do their scratching out. Then when they are sure they’ve got all the correct information in the right place, they’ll neatly print the final copy of the forms to submit. (And, yes, typewriters are still in existence for anyone whose handwriting just won’t cut the mustard.)

2. You should provide as much detail as possible in response to the lender’s questions.

3. You should be able to provide personal tax returns and business financial statements (if applicable) for the last several years and “year to date” for the current year.

Having information, statements, and documents ready helps the lender give you a quick “yes” or “no” on your funding request.

4. You should have a recent and detailed personal financial statement for each owner.

Many first-time franchisees use personal assets for collateral in their franchise borrowing, so be prepared with detailed personal financial statements listing all assets and debts for each person who has an ownership interest in your enterprise.

5. You should have a good estimate of all costs related to your request.

6. You should have invoices or sales quotes for all equipment.

As discussed earlier, the lender should be familiar with the concept you are dealing with and, therefore, should be able to spot expenses that are not estimated accurately. You can lose a lender’s confidence quickly if you provide inaccurate, unrealistic, or misleading information.

7. You should have a clear, concise, and logical business plan.

8. You should have résumés explaining management experience.

A solid plan and record of your experience and how it qualifies you to own and run your franchise business will dramatically increase the likelihood of funding approval. Moreover, these items could also help you get a lower interest rate or reduce the amount of collateral required.

9. You should be prepared to explain any unfavorable credit issues, whether they are personal or business-related.

Lenders don’t like to be surprised, so be upfront with them. Many lenders pride themselves on finding ways to do business with applicants who have less-than-perfect credit. Let them earn that reputation. Prior mistakes they will understand, but withholding information or glossing over past credit problems raises red flags.

10. You should show your lender that you maintain accurate and up-to-date business records.

As mentioned earlier, any lender worth its salt should stress the importance of keeping accurate records. It will then be up to you to show the lender you can do it.

11. You should approach your lender in a businesslike manner and with a positive attitude.

12. You should do all you can to build confidence and trust between you and your lender.

Sports fans and coaches want to see confidence displayed by their on-field generals whether they are a pitcher, quarterback, cleanup hitter, or point guard. Well, you’re the quarterback of your franchise. If you don’t have confidence in your success, it’s hard for anyone else to have it.

13. You should give your lender a reasonable amount of time to review your requests.

You should expect your lender to be prompt in making a decision, but your expectations need to be realistic. You can lose your lender’s goodwill if you are unreasonable. For example, if it has taken you several weeks to pull together financial data requested by the lender, don’t expect a same-day decision once you’ve provided the last bit of information the lender’s been awaiting.

Yes, that’s two long lists. But look at them carefully, and you’ll find a roadmap for a successful business relationship with your lender.