Top 10 Most important factors that SBA 7(A) Lenders consider on loan sizes from $150K - $5 million.
- Personal Fico Credit Score – Banks want to see 5+ years credit history with 4 – 5+ creditors with no recent judgements, liens, bankruptcies, foreclosures, or unexplained recent late pays in last couple years. Lower scores can be O.K. if proper reasons. Scores of 700+ are important.
- For start-up franchise loan requests, banks will usually require 20% down payment. Funds should come from cash available or by leveraging your retirement or non-retirement securities. Lenders do not like down payment injection money coming from borrowed funds (family, HELOC or other loans), but is allowable if other household income is available.
- For Franchise financing always go to the right bank. Most SBA 7(A) lenders do not want to finance under $500K size loans or under $350K with low to no collateral start-up loans. It is crucial to only utilize a pro-franchise preferred PLP SBA Bank (preferred, experienced lender). An expert franchise loan consultant will have a list of several aggressive lenders for start-ups, expansion, acquisitions, conversion, and other types of franchise funding needs.
- Collateral (personal and business) is more important on start-up franchise lending requests. Most banks want high or full collateral to match the loan request, which is why banks nationwide get a bad reputation. They do not want to take on any risk and only want to lend to an “A” level borrower. Again, go to the right type of lender who does not consider collateral as important to credit score, net worth and strength of franchise (for example) is key to SBA loan approval. Be prepared to need some personal collateral (10-30%) on start-ups and less on expansion and acquisition loan requests.
- Know your #’s! Eventually all loan applicants will be speaking with the bank’s underwriting department (The loan decision makers). You must be able to exactly know your net worth, total liquid cash, household income, monthly personal expenses, total project costs of your franchise investment (breakdown of all costs of equipment, build-out, working capital, rent, pro-forma projections). The more knowledgeable and organized you are, the more confident the bank will have in you, bottom line.
- Your background/experience and being able to tell your story and why you will be successful to sell the bank on why their risk lending to you, is definitely at top 5 factor in giving yourself a leg up on getting a loan commitment letter approval and eventual funding. If the bank likes your background, which doesn’t always need to have direct industry experience (the franchise will train you) on a start-up SBA loan request and likes you in general, then your chance of successful decision is maximized.
- Low overall personal debt– If banks feel that your overall personal debt is high and current household income is barely covering your expenses, your potential for an SBA franchise loan is greatly reduced. High overall mortgage debt with minimal equity, high credit card debt in the $30 – $50K+ range and unpaid past due taxes are key liabilities that a bank will scrutinize. On $250K+ loan request, one will need to have a network over $200K most of the time and have debt at a “reasonable” range.
- Strength of Franchise Brand -Banks who are more aggressive with franchise lending will be even more interested when your investment is an established franchise brand with 50+ locations, 10+ years in business or 100+ open units/locations, for example. Many times, it can be the difference whether someone gets loan approval or not. The bank simply feels less risk when a franchise has minimal to no failure rate with many years in business. Many franchisors will disclose franchise earnings in their FDD (Franchise Disclosure Document) which is even better. Newer franchise brands simply need a stronger borrower (higher net worth, more cash, collateral, etc.).
- Cash Reserve/Liquidity One of top 5 most important criteria a bank wants to see upon a borrower’s application is what type of extra cash is available after loan down payment is paid, such as franchise fees, which includes franchise fees on a start-up investment, usually at least a 3 month reserve (your total personal monthly expenses/overhead x3), money to fall back on , similar to why the bank will include additional working capital with your business loan. A good franchise loan consultant can provide funding strategies to help with obtaining more cash reserve funds, if needed.
- Be professional, courteous, accessible, and genuinely excited about your franchise business. I have experienced over the years, applicant borrowers who cannot sell themselves, miss bank conference calls, have a bad attitude, and even complain as they are speaking with the bank decision makers! The right bank wants to lend to you, it is how they make their profit, they are looking for reasons to approve you, so you must not make their decision more difficult. Be positive, nice, answer questions as best you can, provide requested documents asap, know your #’s, explain any negatives, discuss why you will be successful and that you are hopefully looking forward to a long-term bank partnership with them.
Don Johnson – Has over 25 years of business ownership experience having owned and sold two successful businesses. Don has been involved in business and franchise lending for over 20 years as an Owner of Diamond Financial/Franchise Lenders (New Jersey office) as well as Principal and Director of Business Development for A. B. Nicholas, LLC, a specialty lending firm. Don has assisted thousands of people nationwide in achieving their business funding goals, assisting entrepreneurs for start-up businesses/franchises, expansion and working capital requests, as well as financing business acquisitions with both SBA and non-SBA loan programs, achieving high success rates, currently working with hundreds of franchise companies, business broker firms and other business lending professionals. Don and his companies are known nationally, and he is regarded as an expert in franchise and business lending, as well as alternative financing. He graduated from Fairleigh Dickinson University. Don is married, has 2 children and resides in central New Jersey.