How To Finance Your Franchise - Part 2 (Negotiating)

So now that you know where to turn for franchise financing, the next step is negotiating for the best deal.

Keep in mind that a loan officer’s job is twofold: He is trying to negotiate the most profitable deal for the bank while also trying to evaluate just how much risk is involved (which is something the bank is trying to avoid).

The higher the risk you are considered to represent, the less negotiating room you will have. And financing rates will be set to reflect just how risky they consider your loan.

So before you even approach a lending institution, it’s best to have all of your financial ducks in a row. It’s time to roll up your sleeves, do your homework and be prepared to share financial projections, business objectives, financial statements, and knowledge of the market that you are about to enter.

Start by zeroing in on your short- and long-term goals. What kind of loan do you need? What, ultimately, would you like for the outcome to be, and just how far are you willing to go? You must consider your funding sources, whether you feel at ease putting up collateral, and what sort of financing you feel comfortable taking on. You need to have a clear idea of what pricing and loan structures will work within your business plan.

Once you’ve narrowed down where you can turn for financing, you’ll need to be patient as the loan officer pulls together his proposal. Once the terms are on the table, thoroughly evaluate and think through what he has to offer…and don’t put all of your cards on the table immediately.

It’s time to negotiate.

In most cases, these points are up for negotiation:

  • Loan structure/interest rate
  • Bank control
  • Loan covenant package

Loan structure – The terms and conditions of your loan are all variables. Your choices for loan duration, interest rate, security and prepayment must be considered. Shortened loan duration, collateral and your personal guarantee can greatly reduce the interest rate. You will need to weigh the pros and cons of what works best for you, though, both personally and professionally. Risking your personal financial security, as well as your own assets, may not be worth it just to get a lower interest rate.

Bank control over accounts – The bank may be more willing to give you a lower interest rate if you give them control over your accounts. Doing so could mean that the bank manages your personal accounts as well as your management’s.

Loan covenant package – The lender expects the borrower to meet certain conditions as part of the term loan agreement. These can include: requirement to carry liability insurance; submitting monthly financial reports and annual corporate tax returns; and, worst-case scenario, the lender’s ability to restrict how the borrower conducts business. Violating these conditions can lead to default on the loan and certain penalties. The loan could be called, which means it is due in full immediately. For that reason it is important that you are comfortable with all the terms and confident that you can meet ALL the terms of the agreement.

A final word of warning: Make sure you read (and understand) the fine print before signing anything. Have an attorney review the details if you are unsure about any point.

Now that you are armed with a better understanding of what opportunities may exist in negotiating financing for your franchise, it’s time to put into practice one of the most important skills that any business owner can possess -- the ability to negotiate a good deal.

Good luck. And good negotiating.

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