Your Funding Pre-Approval Should Be More Than Just A Piece of Paper
There are a lot of things to consider if you’re exploring franchise ownership; Which brand is the best fit? What is the local market potential? Is real estate available?
But, arguably the most important consideration, especially early in the process, is how you are going to pay for the business and how much financing you qualify for. Funding can influence which brand you select, whether or not you start with one unit or multiple units, and even how quickly you can get your doors open.
When you start with a clear picture of your funding options and overall funding strategy, you’re able to take a holistic approach to the investigation process and be much more confident with your franchise purchase decision.
A Pre-Approval Letter is Not a Loan Guarantee
An SBA loan is one of the most common methods of financing a new franchise business, and many franchisees proceed with the purchase of a franchise after they receive a Pre-Approval Letter from a lender. A Pre-Approval Letter is generally based on a set of assumptions and not a guaranteed loan offer, but states that a lender is tentatively willing to lend the necessary funds up to a specific loan amount. It is an indication that the franchisee is likely to be able to secure financing and is often the green light eager business owners need to continue their pursuit, such as paying the initial franchise fee (typically between $20,000 - $35,000), because it gives them the confidence to move forward in the process.
But sometimes a Pre-Approval Letter is issued to a client who is then denied a loan later on. So, how do you know whether you can trust a funding company’s Pre-Approval Letter or if it is just a token tool to get you in the door?
What to Expect from Your Funding Provider
A responsible funding company should not rely solely on the information provided by a franchisee because there are a variety of factors that go into determining how qualified a borrower is. There are times when a franchisee will omit critical financial details in fear of being denied a pre-approval, which only creates bigger problems down the road. It is much better to be forthcoming and know up front if you are in a good position to get the necessary funding, because an ideal funding partner will be able to give you guidance on areas that should be improved to increase the amount of financing for which you qualify.
Before providing a pre-approval letter, a funding company should complete the following checklist:
- Review of tax returns/interim financials for the business you plan to purchase (if an acquisition) or fund (if existing, operating business)
- Have at least one detailed consultation with you (instead of just having you fill out a form) that addresses the following:
- Lease expenses if you’re renting an office/warehouse/retail location
- Loan payments
- Your equity injection (down payment) and how you will satisfy this requirement
- Your “burn rate” to verify the required cash reserves and/or income needed
- Bank and other loan fees
- Strategy to fund locations two and three (if multi-unit)
- Overview of the process and next steps, so there are no surprises
- Soft credit pull that verifies your current credit information and history, as well as providing your Small Business Credit Score (SBSS) that all SBA lenders check before approval
If you are considering franchise ownership, you will save time and a lot of headaches by addressing the funding piece of the equation on the front end with an experienced franchise funding partner. Your funding partner should be completely transparent when it comes to how qualified you are for financing, and a detailed analysis of your financial position and business plan should support your pre-approval.
FranFund is a top IFA supplier and recognized as a top franchise funding supplier by Entrepreneur Magazine. Founded by a veteran in the franchise industry with first-hand experience as a franchise owner, franchise developer, and new franchise creator, FranFund specializes in funding solutions for franchisees. With its deep roots in franchising, FranFund knows how to navigate the challenges associated with starting or growing your business.
By utilizing its franchise-specific pre-approval tool and cultivating an extensive network of lenders who are comfortable with the franchise model, FranFund’s loan approval rate is 99%.