Franchise finance – how your credit record affects your loan application
If you’re wondering whether you would qualify for a bank loan to purchase a franchise, this article is aimed at you.
Lenders look for a few specific things in a franchisee
A bank would look at the strength of the franchise brand and business model, even before they look at the prospective franchisee. If an institution is going to lend money for a franchise business, it naturally would want to feel comfortable about the franchise.
Then the lender we look at the operator. It would want to see a good personal credit record. It wouldn’t have to be a perfect credit record, but they would want to see a generally good payment record. If an individual has judgments, bankruptcies or tax liens, the chance of getting bank financing is going to reduce. The rehabilitation of such unpaid debts would however be taken into account.
Experience and Assets
An institution wouldn’t stop there of course – it would want to see some management experience, and also some assets behind the applicant’s name. Even if one is looking to acquire a popular and successful franchise brand, the chances of being able to borrow money without having any credit record or, indeed, a poor credit record is not very good. In that case, the best option is to raise money from friends and family, since they know you on a personal level.
Sometimes it helps if the franchisor has a relationship with a lender or an equipment finance company. They will be in a better position to know the risk profile the lenders are looking for. However, it is unlikely the franchisor is going to guarantee your debt, so your credit rating is still what will count in your loan application. If security is required for the loan, you will need to provide proof of assets or policies that may be provided as security, such as a property in your name or policies with a surrender value.
What are the alternatives? If you have a bad credit rating, sometimes all that can be done is to go back to having a job, pay off debts and come back with your credit house in order in a few years. Another alternative is to manage your credit rating in the first place, so you always have a clean credit rating.
This is how you manage a clean credit rating:
Know your status!
Regularly check your credit records at all credit bureaus. South Africans are entitled to one free report a year, and thereafter you can purchase additional reports for a small fee. It’s worth it, because it is important to ensure the information various credit bureaus have on you is accurate and up to date – especially if you anticipate that at some time in the future you may be applying for large loans or additional credit.
If you don’t use it, close it
Regularly reassess your monthly expenditure and if you notice that you are spending on items which you can cut down on, do so and thereafter close any retail accounts you no longer need. The credit card rating of someone whose debt-to-credit ratio is 70% or below, will be better than for someone who reaches the maximum limit each month.
Job stability and a higher score go hand-in-hand
A lender will also consider how long you have worked at your current job, how often you move homes and so forth. Such stability is regarded as an indication of your stability and trustworthiness – as well as the risk associated with collecting the debt from you in the event you default.
Ensure that all your bills are in your name and that you keep proof of payments. In the event that you have paid all debts in a timely manner over the years, you may be eligible for a more favourable interest rate, and a good credit rating. However, to get this it is crucial that all your bills and debts are in your name so that you can prove it. Repaying someone in a personal capacity will in no way contribute to your credit record.
Pay above the minimum monthly payment
If you regularly only pay the minimum and make little impression on the capital owed, not only do you pay the maximum interest, but the card company may interpret this as a sign of distress. Therefore, with every repayment try pay a little extra.
These tips apply to anybody’s credit rating – but for an entrepreneur likely to be tapping the credit market at some point, it is essential.