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Financing to Start a Business

Written by : Mary Sullivan
2009-11-15
A reader recently asked about obtaining a loan to finance the start of his pastry shop franchise. He is currently training with an existing franchisee to learn the recipes and the business, and he hoped that would help him get a loan to cover the purchase of initial inventory and funds to get him through the early months until the business was self-sustaining. I contacted an experienced commercial banker and asked what weight lenders give various factors when a person applies for this type of business loan.

I thought Id share as a post what I passed on to the reader: Top on his list of criteria is how much of the needed funds the business owner plans to put up personally. Also high priority is the quality of the franchise company -- "There is a wide range of success/failure factors that separate franchises." Planned business location is also a consideration with lenders. "What is the growth trend in that particular neighborhood ... declining, or lots of new construction, etc.? And what is the competitive situation in the proposed location?" Two other considerations are: how well thought-out the business plan is, and of course, prior experience. You wont have had ownership experience, but youre getting good practical operating experience.

THERE HAS BEEN industry and media speculation that lenders are winding back their lending and making it more difficult for those seeking to obtain finance in the current environment. This is certainly not the case from my perspective as a NAB banker, with the bank lending to the franchise sector achieving records - and increasing in numbers over recent months. We remain very much 'open for business'and are expanding the size of our franchise banking team. Bank lending guidelines are influenced by many factors. You should expect the Bank to have a rigorous credit assessment process in place, not unlike your own assessment process around investing into a franchise system. Lending capacity should primarily be assessed against the underlying risk profile of the business.

Just as business owners are being challenged, so are banks, but you should find most prudent lenders remain open for business. Such lenders will continue to be active in the market, will be looking to provide credit to both existing customers and attractive new customers whilst at the same time continuing to grow their market share.

These prudent lenders will be on the front foot and not looking to pull back in the current environment. The flow on effect from the above is that good quality, well-managed and tightly-run businesses should continue to enjoy the support of their financier. To give yourself the best chance, when dealing with a financier in the current market, ensure that information is presented in a concise and professional manner. Gaps in information provided, or an inability to provide some basic detail, will cause more challenges for you in obtaining what is required.

Business fundamentals should continue to drive the appetite of your financier. Well-run businesses with a clear strategy and sustainable business model should continue to enjoy the support of their current financier. If not, I encourage you to seek out a new financier who is better positioned to help you through this challenging environment. Just like you and your customers, relationships forged with financiers in the current market have the potential to grow into long and enduring ones which will become the key to the long term success of you and your business. Do your research - or better yet, have the bank do it for you! The majority of the strong franchise systems will have arrangements with banks that make the basic process of getting finance to buy your business as easy as possible. As well as streamlined lending processes, these arrangements allow the franchisee to repay the money within a reasonable period of time while making a profitable living. A good bank with a specialist franchise banking division will only look to establish packages for franchise systems that are well developed or established, financially strong, provide people support, training, processes, marketing, operational support, and importantly, allow franchisees to make enough profit from the business.

Right bank How do you choose the right bank? You should choose a bank that specialises in the franchising sector. You need bankers with franchising knowledge that will understand the current climate and the dynamics that will affect your franchise as well as sector-specific business acumen to make the process smoother.

Whilst finance may be an essential ingredient to making your dream come true, ask your banker about other essential business services such as superannuation plans for staff, business insurance, and financial planning advice as well. You want your banker to work closely with you to give you financial, business and personal wealth advice, not just assistance with loans.

It is also important that you choose a bank that can help you achieve both your business and personal aspirations and establish an ongoing relationship with that in mind. Wealth creation should be looked at on a holistic level. Business and personal financial goals shouldn’t be separated as it’s likely you can make them work for each other. Ideally your franchise business banker will have access to other specialists within the bank and deliver the right advice for you in the areas of wealth management and financial planning.
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