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Unlocking the Credit Box

The best first step is to develop your business plan and explore your borrowing options.

Remember that first road trip with your family? No chance dad was going to ask for directions, but mom was all too willing to give them. These days, we just get in the car, pull out a smartphone or GPS and “BAM,” follow the blue line, and you are at grandma’s house.
If only borrowing money for a new franchise was that easy. The good news is it just might be that easy. A clear roadmap and game plan to your new loan isn’t as difficult as you might think.

No matter what city or state that their franchise locations are in, companies are hard at work building and maintaining their brand. That’s part of the appeal to become a franchise owner – a recognizable, proven and successful business model is already there, like a fast-food drive-through on a road trip.

However, opening a new store takes careful planning and strategy. The best first step is to develop your business plan and explore your borrowing options.

Preparing to Go to the Bank

Applicants for a U.S. Small Business Administration loan must meet certain government requirements, including operating in the United States, organizing the business as a for-profit entity and being “small” as defined by SBA. Features of a SBA Loan are also regulated by the SBA and include options to protect the borrower, such as longer terms and no balloon payments.

Look for a bank that has experience and knowledge in SBA lending, because that bank will have the infrastructure to handle your request. Even better, look for a SBA “Preferred” Lender or Preferred Lender Program, which has delegated underwriting authority for loans from the U.S. SBA.

What a Lender Wants

One of the most common mistakes you can make is to seek financing before your project is ready. The bank can talk with you about financing structures and options, but is unable to issue a commitment before specific financing costs are identified.

For example, you will need documentation, such as labor and material estimates from a licensed contractor, for the lending analysis. Similarly, if you are buying an existing business or structure, the purchase and sale agreement is vital to the lending decision.

Most lenders will expect the project to break even within the first year of operations. Don’t be afraid to include a working capital line of credit in your borrowing plan. A primary SBA loan can include a companion SBA Express line of credit (a subset of the 7a loan program), which allows you to draw money for things like payroll and inventory. You pay it back as your receivables are collected. Generally, the line of credit should be paid down to zero at least once a year.

Lenders also want to finance successful franchise concepts. An easy way to determine the historical success of your franchise is to analyze the number of franchise locations year over year. All franchisors keep this data. Ask your franchise representative for the Franchise Disclosure Document. A franchise that is losing locations will be a red flag to the lender.

You’re Approved

Congratulations. Now that your loan is approved, the bank will ask for documentation before it disburses your loan.

Commercial and small-business loans are usually more complex than a home mortgage loan, and the lending process is dynamic, so be prepared for a longer turnaround time. You can help as a borrower with timely responses to inquiries for documentation. Timely responses not only speed up the process, but tell the bank you’re organized and ultimately a safer risk.

After the closing, the real work begins; you’re about to be a business owner. Fortunately, there are a variety of resources to help you succeed, right in your own backyard. A good map and plan are like today’s GPS for your road trip to ownership. It will save you time, get you the loan faster and get you to a grand opening in no time.

Tips to Help Get Your Loan Application Ready Before Heading to the Bank

  • Have your personal financial information up to date. Print and sign three years of personal tax returns (all schedules). If you’re missing a year, order a transcript from the Internal Revenue Service.
  • Do the same if you have an existing business; prepare three years of business tax returns (all schedules), as well as a current balance sheet and a profit-and-loss statement.
  • Know your credit score. Most banks have a minimum Fair Isaac Corporation or FICO score requirement between 650 and 670.

Include the following in your business plan.

  • A project outline that includes all proposed costs – detail each stage of the project. Identify costs that have already been paid and be prepared with documentation to prove it.
  • Projections by month for year one, including ramp-up and breakeven point.
  • Identify any available collateral; if the project does not include real estate, include outside the project assets such as a house or stocks and bonds.
  • Conduct a demographic analysis. Discuss why your product is a good fit for the location and quantify the opportunity. Never underestimate the power of charts and graphs to reinforce your research.
  • Your planned management structure; consider forming a corporation or Limited Liability Company or LLC.
  • Consider noting for your banker if you are a veteran. TD Bank has just partnered with the International Franchise Association to offer, through a select list of franchises, better financing options for veterans.

Richard Bradshaw, who is head of SBA Lending for TD Bank, is also a board member (Large Bank seat) of the National Association of Government Guaranteed Lenders. He can be reached at

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