Startup financing easier to find for franchises

It’s no secret that obtaining small business loans in today’s tough economy is harder than ever, even for established businesses. But, for people absolutely determined to begin their own businesses, startup loans for franchises might be easier to find.

Lenders hate risk, and there are fewer loans riskier than startup loans. Franchises, however, have always had an edge of other small businesses because there is less perceived risk associated with franchises for a number of reasons:
•    Franchises have stronger brand presence;
•    Franchises benefit from large national marketing campaigns;
•    Franchises offer training, mentoring and proprietary software;
•    Franchise owners enjoy—and can pass on—low prices negotiated at corporate headquarters.

Those advantages have always resulted in a higher success rate than that of independent businesses—maybe not as high as the 95% frequently cited, but because that’s the perceived success rate, it might as well be when it comes to getting startup loans.

The International Franchise Association has also made it easier for their constituents to receive startup loans by making a concerted effort to teach lending officers about financing franchises. Regional banks have been extending more small business loans than the mega-banks, so the franchise associations are doing all they can to steer more of that money to their constituents.

No business is recession proof, but banks are more likely to give startup loans to a franchise that offers an essential service rather than one providing luxury items. For instance, home fires occur just as often during a recession as when the economy is strong, so restoration business that specialize in fire and smoke damage are more like to receive startup loans.

Other franchise businesses more likely to fare well at the bank and in the market include low-budget family hair salons, child care centers, clothes or furniture consignment shops, and almost any home-based business with very low overhead.

America One Unsecured is one of the largest loan-consulting firms in the country. They have helped their clients secure hundreds of millions of dollars in personal and small business loans since 1999. Click here to learn more about America One Unsecured and how they can help you.

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Nearly every time someone talks about starting a small business, the suggestion of applying for Small Business Administration (SBA) loans comes up. SBA loans are wonderful things – since its inception in 1953 more than 20 million small businesses have received SBA loans – but there are some serious misconceptions and drawbacks to SBA loans.

For starters, the very term “ SBA loan” leads many to wrongly infer that the SBA is a lender. Rather, SBA loans are small business loans from commercial, private or nonprofit lenders that are backed by SBA loan guarantee programs.

Through SBA loans, small business owners who are denied loans are given a helping hand from the SBA through loan guarantees that back up to 90% of the loan total. The advantage for the lender is in sharing the risk of default with the government, so they’re far more likely to approve SBA loans that those without a guarantee.

Another serious drawback to SBA loans is the long and frustrating approval process – for most borrowers the procedure will take six to nine months, and even then the application may be denied. The reasons for this are simple. Borrowers have to go through a lengthy application process with the bank, and then go through an even more rigorous procedure with a federal agency.

But the nature of the loan guarantee is often another source of confusion about SBA loans. Many borrowers think that if they default on SBA loans, the SBA guarantee means they’re off the hook with the bank. Nothing could be further than the truth.

When small business owners default on SBA loans, the SBA may eventually pay a portion of the loan value to the lender, but only after the lender has made aggressive efforts to collect from the borrowers. If the SBA allowed lenders to sell them out to every defaulting borrower they’d soon be out of business, so instead they hold lenders’ feet to the fire. If that means the banks foreclose and seize borrowers’ business and personal collateral, so be it.

And finally, SBA loans can be expensive. The federal government charges a minimum of a 2.5% guarantee fee to the banks, and the banks pass that expense on to the borrowers.

None of this is meant to imply that small business owners shouldn’t attempt to receive SBA loans. It’s just a recommendation that prospective borrowers consider all their options.

Unsecured small business loan spotted in Pacific Northwest

There are some common misconceptions about obtaining an unsecured small business loan. Among them is the notion that the best place to obtain an unsecured small business loan is through the Small Business Administration (SBA). Many business owners believe business loans are only available for established, long-profitable businesses. Another mistake is the belief that business loans have to be secured.

Let’s clear away some of the clutter.

First of all, the SBA does very little direct lending; rather, they guarantee that approved traditional lenders will receive payment on business loans even if the borrower defaults. There are many benefits to taking advantage of SBA lending programs, but the application process is complicated and lengthy. And, it’s at the lenders’ discretion as to whether to demand collateral or provide the borrower with an unsecured small business loan.

Startup loans are generally available to businesses in their second or third years of business, and approval is based almost entirely on applicants’ personal credit and financial statements.

There is a nugget of truth in the idea that an unsecured small business loan is hard to find; they’re rare, but not extinct. Nearly all business loans are secured with equipment, inventory, real estate or other financial assets, but it is possible to obtain an unsecured small business loan.

The secret is in knowing where to look for one. America One Unsecured can help with that. Before you tie up your business assets, contact America One Unsecured, a loan-consulting firm in business since 1999.

As new businesses evolve, their financial needs change, too. Once they’ve made it through those rough early years of scrambling for seed money and start up money and are showing a positive cash flow, it’s time to obtain business lines of credit.

Banks will only grant business lines of credit to well-capitalized businesses with good collateral, but once acquired, they can make the difference between success and failure.

Business lines of credit are amazingly flexible, but come with immutable restrictions:

• They are to be used only for short-term needs, and never for major purchases like equipment or real estate.
• Business lines of credit must be paid back as soon as possible.
• Business lines of credit are typically granted for a year at a time, but can be renegotiated annually.
• Business lines of credit are required to be paid in full for a minimum of 30 or 60 days during each annual cycle.

Credit lines can be lifesavers when accounts payable temporarily exceed accounts receivable. A good example of this is purchasing seasonal inventory months before it will be sold. Another example of wise usage is bridging the gap while waiting months for payment on government contracts that require considerable investment.

Despite all the benefits, business lines of credit have some negatives. Banks almost always charge fees for start-up, transactions and annual usage. And they aren’t easy to obtain. Prepare to present an updated business plan and personal and business financial statements.

There’s a lot of work to do before you go to the bank asking for a startup business loan, and whether or not you get your loan will depend on your expectations and preparations.

What to expect
• Nearly all businesses begin with personal saving and money from friends or family. In fact, unless you’ve already raised 25% of the startup costs from these sources, no bank will give you a startup business loan. If you’re not willing to put your money on the line, why would a banker?

• You’re almost certainly going to need collateral. It might be your house, your car or your inventory. If it’s any of these, don’t expect the value to match that of your cost or appraisal; if you’re unable to pay back the startup business loan, it’s going to cost the bank a lot of money to liquidate your assets. Accordingly, the bank will most likely ask for collateral equal to 150% of the startup loan.

• Showing the bank the money and collateral you’re bringing to the table is only the beginning. You have to convince the lender that your new venture is going to generate enough money in the first year to pay back the startup business loan with interest. Your business plan better be very well researched.

• Your personal credit will be an important factor in acquiring a startup business loan because a new business has no real credit history of its own. If your credit record has errors, correct them; if it has negatives, consider delaying your loan request until you’ve added positive entries and raised your credit score.

• The importance of loan officer’s impression of your character and personal attributes shouldn’t be underestimated. Part of that assessment will be based on your education, professional background and reference letter, but the rest is subjective. Even if your proposed business will allow you to work from home in your bathrobe, dress like a banker for all face-to-face meeting.

• Getting a startup business loan typically takes 60 to 90 days. If you fail to provide required information early on, expect it to take longer. The best idea is to meet with the bank in advance to get a checklist.

The only good news to be gleaned from the Federal Reserve’s recently released second quarter survey is that the news isn’t quite as bad as in the first quarter.

The “Senior Loan Officer Opinion Survey on Bank Lending Practices” provides a very helpful look at the availability of loans for businesses and consumers. This article provides information relevant to business borrowing now and in the future, and describes practices for the period of April, May and June 2009.

• 35.8% loan officers said their standards for commercial and industrial loans or credit lines for small firms (annual sales of less than $50 million) had tightened.
• 35.2% said the same about lending to firms with more than $50 million in annual sales.
• 25% said they tightened limits on credit lines for small firms.
• 60.3% said they raised the cost of credit lines for small firms.
• 64.1% said they increased the difference between what the bank pays for borrowed money, and what they charge for it.
• 58.5% said they tightened their standards for approving riskier loans.
• 35.8% tightened collateralization requirements.
• 46.3% said they tightened credit standards for commercial real estate loans.
• 42.8% said they decreased the limits on existing credit lines for commercial construction.
• 48.7% said they decreased the limits on existing credit lines for financial firms.

Forecasting
If your bank has tightened standards, when will your bank loosen standards for investment-grade firms’ commercial and industrial loans?

• 2.3% said by the end of 2009.
• 11.4% said in the first half of 2010.
• 36.4% said in the second half of 2010.
• 4.5% said in 2011.
• 20.5% said their standards would not be loosened in the foreseeable future.

If your bank has tightened standards, when will your bank loosen standards for commercial mortgages for investment-grade firms?

• 0% said by the end of 2009.
• 2.2% said in the first half of 2010.
• 22.2 said in the second half of 2010.
• 20% said in 2011.
• 40% said their standards would not be loosened in the foreseeable future.

If your bank has tightened standards, when do you expect to loosen them for below-investment grade commercial and industrial loans?

• 0% said by the end of 2009.
• 4.2% said in first half of 2010.
• 29.2% said in the second half of 2010.
• 31.3% said in 2011.
• 22.9% said they didn’t expect any changes in the foreseeable future.

If your bank has tightened standards on commercial mortgages, when do you expect standards to loosen?

• 0.0% said by the end of 2009.
• 0.0% said in first half of 2010.
• 10.2% said in the second half of 2010.
• 28.6% said in 2011.
• 53.1% said they wouldn’t be loosening standards for the approval of commercial loans anytime in the foreseeable future.

We've spent some time on this blog talking about generating financing for your business. But what do the decision-makers - - the banks, the credit lenders, the Small Business Administration, and other financial organizations -- look for when deciding whether or not to lend you their money?

Actually, it's not all that complicated. The information below will give you a heads up on what more traditional financial institutions will ask for when you apply for lines of credit or loans through the Small Business Administration (SBA.). The SBA, by the way, has an excellent checklist of documents needed for its loan process.

For both types of common loans (short-term and long-term), your business (or business-to-be) requires the following documentation before your loan request can be evaluated:

• A business profile. This is a written statement.  A document describing the type of business you own, and includes details, such as annual sales, number of employees, length of time in business and specifics of ownership.
• Loan request. This is a description of how you want the loan funds to be used. This statement should include purpose, amount and type of loan.
• Collateral. This gives the lender a description of the collateral you’re offering to secure the loan, including equity in the business, borrowed funds and available cash.
• Business financial statements. These are complete financial statements for the past three years as well as well as current interim financial statements.
• Personal financial statements. These are statements of all the owners, partners, officers and stockholders who owning 20 percent or more of the business.

Be sure that your financial statements are carefully prepared and up-to-date! The strength and accuracy of your financial statements will be the primary basis for the lending decision to go in your favor, so be sure that yours are carefully prepared and up-to-date. 

The most important documents in your financial statements are:

• Balance sheets from the last three fiscal year-ends.
• Income statements revealing your business profits or losses for the last three years.
• Cash flow projections indicating how much cash you expect to generate to repay the loan.
• Accounts receivable and “payable aging,” breaking your receivables and payables in to 30-, 60-, 90- and past 90-day old categories.
• Your personal financial statements from you along with statements from your business partners listing all personal assets, liabilities and monthly payments, as well as your personal tax returns for the past three years.

What to include a loan proposal…in a nutshell:

• Business name and address
• Names of principals and their social security numbers
• Purpose of the loan---be as specific as possible about what it will be used for? (salaries, equipment, etc.)
• Amount of money you need: EXACTLY

Business description:

What kinds of business?

History?

How many employees and current business assets do you have?

Management:

Offer a short description on each principal…including background and education, experience, skills and accomplishments.
Market:  Demonstrate knowledge over your product(s) and where it fits in the market(s). Competition and role in the overall marketplace
Sketch customer profile and how you business can fulfill customer needs.

How banks will review your loan proposal (in a nutshell)?

1. First and foremost, they want to see PROOF they will be repaid
2. That means they'll investigate your credit
3. Outside sources of funding (at least 25-50%) will strengthen your case
4. Sufficient experience to pursue business enterprise
5. Suitable cash flow for business to run

The key? Be prepared and have both your documents and financial story in order. If so, the road to solid financing is wide open.

Unless you're independently wealthy, you'll probably face the most common (though hardly unsolvable) problem when you start up your business. That is securing a reliable cash flow and obtaining financing sources. Big questions and daunting procedures, such as "how do I apply for a loan?" or "what is a credit line?" or "what if I'm a victim of discrimination?" could discourage and frustrate the most enthusiastic of new business owners. But, they don't have to hold you back.

If you do your homework and are prepared for the inevitable difficulties of this complicated process, you'll be well ahead of your competitors. That's a good thing - - after all, there is only so much money to go around.

Where should you start?

A good rule of thumb here is to discount nothing (and no-one) in the preliminary brainstorming stages. Financing can come from a vast number of people and institutions, including your family and friends. However, in all cases, you should strive to make the process wholly professional and for obvious reasons always respect the money (and time) of others.

Helpful hint: It's best to pursue parallel funding from several sources, including your own savings, family and friends, potential investors and bank loans. So it makes sense to hire an attorney to help you with payback terms, or you can draft your own terms of agreement to re-pay any loans.   One thing is certain: Disputes over money can make or break a relationship!  So you'll also want to look as professional (re: prepared!) as possible, and an attorney can help you there.

Here are some more specific suggestions about where to start looking for the money:

• Personal Savings: Use your own savings to finance many up front costs. Saving up over the years can give you a head start and if available, is obviously the best option when looking for funding sources.
• Family members and friends. Here's a group of your most staunch supporters and loyal allies. These familiar individuals are far more likely to loan you money without interest and/or at a far lower rate than a bank. (You'd be surprised how many companies started with help from personal friends or family.) However, there also the same people who might take you a little less seriously, maybe they even knew you when you were in grade school. That's all the more reason to present them with a re-payment plan that's satisfactory along with a neatly organized business plan. You don't want to lose their friendship and loyalty.   It's best to approach your family and friends with a list of funding options. Don't play with anyone's money, including loans from your mother or father.
• Angel investors or Venture capital firms: Be forewarned. These investors are usually more inclined toward large experienced businesses, but that doesn't mean they won't sometimes take a calculated risk on a Really Good Idea and an impressive new business owner.
• Finance Companies: According to the Small Business Association, finance companies are consistent backers of new small-sized companies.  Benefits of using a finance company include their flexibility and longer-lease times. They can also provide you with funding more quickly. On the other hand, finance companies charge much higher rates.
• Banks and credit unions: This route requires you to write an effective loan proposal. It's helpful to remember exactly what banks are looking for, so you don't waste time and you know what to emphasize in your application for loans.

In the next small business blog, we'll go into more detail on what banks and lenders look for when deciding to fund a new business venture -- or not.