Purchasing a Franchise & the Importance of Incorporating & Building Your Business Credit

Franchise financing, like any other type of small business lending, is normally credit-score based.  Because lenders are concerned with a franchisee’s ability to repay a loan to start a franchise, factors like a track-record of defaults, slow pays and non-payments could raise a red flag.  Even though your business plan and financial projections demonstrate that you have done your due diligence to build a strong foundation for your future success, a banker or lender will look strongly at your past successes or failures as well.

Since most lenders will want to see that a franchisee has money of his/her own to invest in the small business startup, your credit strength can be equally important if you have to finance it as well.  Whereas many hopeful franchisees tap into family and friends to put together their share of the  business startup costs, if borrowing this portion of the startup money is necessary as well, then ensuring a stellar credit rating will be necessary. 

Banks and investors will raise interest rates if they feel there is a higher risk that you won’t be able to repay the debt or if you have a blemished credit history.  Additionally, if you need to lease a store front or commercial property for your new business, most leasers will require a personal guarantee on the lease and will run your personal credit in order to make the decision to or not to lease to you, and at what terms. If fear of credit blemishes is keeping you from realizing your goals is an issue, consulting with a credit counselor early on might be a good solution. For help with questions about franchise financing, new business financing or small business credit, please contact us.