Funding Pre-Approval: Is it worth it?

by Sherri Seiber, COO, FranFund

Owning a franchise can be one of the most rewarding and exciting experiences of your life. Like many other major purchases, it usually requires financing. When shopping for a new home or a new car, how would you determine your price range? You could go to a dealership and test drive the flashiest vehicle you see on the showroom floor. You could meet with a realtor and tour the biggest, most expensive home they have to offer. Alternately, you could contact a lender and obtain pre-approval, which would be a much wiser way to make a major purchase.

Although obtaining preapproval for a franchise purchase is more complicated than buying a house or a car, the premise is the same: a potential lender checks your personal financial history to determine the range they’re comfortable lending to you. This is to help ensure that you make the best investment possible. There are several factors that lenders consider before providing a business loan, which fall into four categories: credit, equity, collateral, and burn rate. by Sherri Seiber, COO, FranFund

CREDIT is your personal credit score and financial history. The lender will look to see that you have demonstrated responsible use of credit in the past. Items such as late pays, delinquencies, medical charge-offs, and credit card debt ratios will be considered, as will timely payments, length of credit history, and types of credit used. If your credit is not strong, FranFund will help you explore other funding options, including 401(k) business funding.

EQUITY is what lenders refer to as your “skin in the game.” The personal equity – or cash – injection required by a lender can range from 10% to 30% of the total project cost. This number depends on the type of loan, the size of the loan, and the borrower’s financial health.

SBA LOANS require the borrower to pledge an asset as collateral, such as a home. Although a home is the most common form of collateral, alternatives exist. SBA loans typically have the advantage of being lower interest and more flexible than alternative options.

BURN RATE is the rate at which an enterprise or individual spends money. The lender requires a business owner to have postloan liquidity via an outside source of income – such as house payments, groceries, and utilities – to cover personal expenses, as well as the SBA loan and the business lease during the critical startup phase of the business.

FRANFUND designs flexible funding plans that help new and experienced business owners fund their franchises. We have a powerful and accurate pre-approval process. Our former bankers analyze a candidate’s financial situation the same way a lender would, and we have a 99% success rate in obtaining loans for borrowers who received FranFund pre-approval! Whether you’re considering your first franchise purchase, or are an experienced franchise owner, FranFund is here to help.