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Business Loans – Understanding Lenders and How to Win Them Over

One of the most important things when considering business ownership is the question of how you’re going to pay for it. Since most people have experience obtaining a home loan, we frequently hear from clients, “I’m just going to go down to my local bank to get a small business loan.” But while that strategy may work sometimes, the fact is, not all loans are created equal and for most potential small business owners using their local lender won’t be a viable option. Though the lending process can seem challenging, it doesn’t have to feel insurmountable. There are countless scenarios, so let’s explore some of the basics.

All Lenders are Not Created Equal

Every bank or lender has their own profile for the types of loans they want in their portfolio. This “credit box” prioritizes whatever type of lending that institution has identified as the most feasible for them and dictates their interest in making certain loans. For example, some banks are not interested in funding small businesses at all, and only focus on commercial development, real estate, oil and gas, etc. Many banks are only interested in loans over $500,000, which is typically far higher than many small businesses require. In addition to loan size, there could also be criteria for a specific geography, which could mean that some banks will only loan to companies in the city limits, the state or certain adjacent states.

But, in the same way small business loans aren’t a target for some banks’ portfolios, there are lenders that actively seek to and want to lend in the small business space. These lenders specialize in the smaller loan amounts, know the risk profile of franchising, and will lend nationwide if the company is a franchise system or in specific industry they prefer.

Once a lender has identified that a potential borrower’s loan request fits their preference for a particular geography and loan size, their next step in considering the loan is to understand the age and type of business. Here are some standard criteria:

  • Is the loan for an existing business or a start-up?
  • Is the business an independent operation or a franchise?
  • If it is a franchise, is it a national, regional or local brand?
  • How long has the franchise system been in existence? If it a well-established franchise system with multiple proven operators or an emerging brand?
  • How many total units does the franchise system have?
  • What is the industry segment being addressed? (i.e. automotive, fitness, healthcare, etc.)
  • Is the borrower a first-time business buyer, or is this an existing owner considering expansion or a remodel?

As you can see, these are all vital decision points, and creditworthiness hasn’t been considered yet!

Loan Applicants Need to Consider Several Issues

Let’s discuss some of the points above.  Securing small business financing can be challenging for new business owners because banks and other lending institutions can be quite rigorous in their lending practices.  Lenders that are familiar with the franchise model and the value it brings are more comfortable with the support system that franchising offers.  Having said that, the majority of lenders consider a first-time business buyer to be a high risk. This is why relying on using your “local bank” isn’t a dependable strategy, because if small business loans aren’t part of their “credit box” you won’t be getting the best rates and terms if you receive a loan offer at all. The borrower may be buying into a well-established brand with hundreds of locations nationwide, and the bank likes that, but still, that new entrepreneur has no track record of running a business, and that is a significant concern.   Here are some requirements that an ideal candidate should be prepared to show:

  • A first-time business owner will need to show that they have a track record of profitability and success in a similar business endeavor.
  • An existing business owner will need to provide evidence of stable cash flow sufficient to repay the loan.
  • All borrowers will need to demonstrate sufficient assets, financial reserves and collateral to endure the inevitable business fluctuations and still repay the loan.

As you can see, this list can present a challenge for prospective and existing small business owners!   We share this information to prepare you for the process of finding the right lender, but as a borrower, the only thing you can indeed control is how you prove your creditworthiness.  Lenders tend to get comfortable lending to a particular type of borrower, buying a specific kind of business; for this reason, do not be discouraged if finding the right lender seems to be a daunting task.

How to Prove You Are Credit Worthy

While banks need to lend to make money, they are inherently risk-averse, so it is up to you to impress them. The concept is a bit counterintuitive – though they are actually “selling” you a product, in order for you to buy it (i.e. obtain the loan), you have to sell them on why you deserve it!

Try putting yourself in the lender’s shoes. Prepare your business plan, financials and loan application as if you are going to a job interview and then ask yourself, “Would I lend someone money under these circumstances?”. Create a comprehensive story about why you and your business will succeed based on your experience and skill set, in addition to a detailed explanation of how the money will be used. The MOST important answer to prepare is for the question “How will you repay the loan?”. The answer most borrowers want to give is that the revenue the business generates will repay the loan. And while that is indeed the goal, the tricky part is how you will make the loan payment, the lease payment (if real estate is required), the equipment lease payment, the surprise start-up costs and your personal expenses before the business cash flows? The answer to that question will likely make or break the lender’s decision to approve your loan.

Consult an Expert

There are resources available if you need help finding the right loan for your business or a guiding hand to offer advice through the application process. Most cities have local Small Business Development Centers (SBDC) along with SCORE offices (SCORE is a mentoring organization staffed with volunteer business executives) that are great for advice. The Small Business Administration (SBA) maintains a comprehensive website, www.sba.gov, which contains a wealth of information, tools and tips for small business borrowers. In addition, franchise industry experts such as FranFund, Inc. offer loan packaging and consultation services and will work to identify lenders interested in your type of loan.

Tim A. Seiber, CFE Franchisor Relations
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