THE ART OF BORROWING
Borrowing money from a bank requires salesmanship and preparation.
You can increase your chances of getting that startup loan for your
franchise if you know the right answers to seven questions the loan
officer will ask.
Many businesses need to
borrow startup money, and from the banker's point of view, there
are few quality borrowers. High-quality franchises have a better
success record than independent businesses in obtaining startup
loans, but franchise or not lending is still a buyer's market and
the borrower is the seller. To get a loan you must stand out from
the crowd. You must be different from the typical unprepared loan
Seven questions will always be asked in any borrowing situation.
Most new business borrowers arrive at the bank unprepared to discuss
their loan needs and unable to answer the questions. If you are
prepared and can answer the seven questions, you send a signal to
the banker that you are different, and that your loan application
is worth serious consideration.
HOW MUCH MONEY
DO YOU WANT?
This question gets a lot of attention from the banker. Respond
with an exact dollar amount. An experienced loan officer makes
estimates and closely checks your proposed amount.
There are some who advise asking for more than you need, so if
the banker trims your loan request, you will still get what you
need. Others advise you to ask for less than you need and somehow
plan on stretching it out to make do.
Both of these strategies
work against you, because if you don't borrow enough you might
borrow just enough to get yourself in trouble. Then you have to
go back to the bank and ask for more money which hurts your credibility.
You look as if you do not understand you business needs and you
have made the loan officer look as if he doesn't know his business
If you ask for more than you need, and under questioning reduce
the amount, you look as if your were trying to fool the lender.
Maybe you have some hidden expense you do not want the bank to
know about, like a new bass boat or car?
Franchisees are expected to produce detailed cost workups based
upon information supplied by the franchisor. Don't blindly give
these estimates; add extra credibility by verifying the franchisor's
expense estimates with franchisees already in operation. Modify
projected expenses such as local wage rates and construction costs.
Be as exact as you can, then recognize an amount for errors or
contingencies. The banker will understand this; he allows for
contingencies. Bankers call it an "allowance for bad debts."
WHAT WILL YOU
DO WITH THE MONEY?
Here you need to be as detailed as possible. Normally you can
do only two things with a startup loan: buy new physical assets
and pay expenses.
Don't tell the banker you need money for "working capital"
when the business is losing money and losing cash. Lenders understand
time is needed before a new business turns cash flow positive.
If part of the loan proposal is for cash reserves to carry the
business to the point of positive cash flow, then show it clearly.
If you are purchasing equipment, then list what kinds, from whom,
what warranties are included, and provide pictures or brochures.
If you are building or improving physical property, include any
plans and bids from the contractors you will use. If you are buying
inventory and supplies, give a description of your planned purchases.
List all other startup expenses such as insurance, rent and utility
This list of expenditures will serve as the basic list of business
collateral to be assigned to the bank. Bankers can be good at
checking and figuring costs. They may even have some cost saving
suggestions for your. The banker takes lending seriously and rejects
borrowers who don't take spending seriously.
WHY IS THIS FRANCHISE
RIGHT FOR YOU?
Banks like to make productive loans. For existing businesses,
productive loans help increase sales or reduce costs. These loans
make a company more profitable and create new cash to repay the
For a business startup you must show there is a need for your
business. What market studies have you or your franchisor made?
Who is the competition? Do you have a clear marketing and distribution
plan for your new products? Can you show there is enough customer
You must persuade the lender that the franchisor's business concept,
operational support and training, combined with your experience
and abilities, are likely to be a winning combination.
Banks prefer dealing with larger, more established franchises.
If you are the first of a kind in your town, the lenders will
need more persuading. Come prepared to demonstrate success stories
from other markets. Ask franchisees in other towns if they obtained
bank financing, then ask your bank to talk to these other bankers
about how the agreement was done.
A loan needs to be a good idea for both the lender and the borrower.
Good ideas create jobs, sell goods and services, increase profits,
create cash flow, and repay bank loans.
WHY DO YOU NEED
OUR DEPOSITORS' MONEY?
The obvious answer is you don't have enough money, and banks
do. The follow-up question is "How much money do you and
others have to invest in the business?"
Lenders have learned that a loan is much more likely to be repaid
if the borrower has something to lose as well. No lender provides
100 percent financing.
The lender must be convinced the franchisee is committed seriously
to the success of the business. You will need to invest a minimum
amount, somewhere between 25-35 percent of the startup costs plus
operating losses until the business turns cash positive.
Part of this down payment or investment can be borrowed from
friends, family or business acquaintances, if it clearly is subordinate
to the bank loan. However, you will still need some of your own
cash or other assets as part of the agreement.
Expect your personal financial statement to be reviewed closely.
Do you lack funds because you have luxury assets? Do you have
a good salary at your present job, yet have a small net worth
because you are a habitual gambler or you support a handicapped
child? The lender will want to know.
It is an act of fraud to conceal outstanding debts. By not disclosing
them on your personal or business financial statements, you risk
losing the protection of bankruptcy laws. How you spend your money
is the banker's business if you want to borrow money from the
WHEN WILL YOU
REPAY THE LOAN?
Many years ago banks only made short term loan (90 days or perhaps
a growing season) to finance a specific agricultural or trading
transaction. It was financing a deal, not a business.
When you have a short-term loan, the timing of the repayment
program is obvious. The risks of the agreement can be discussed
ahead of time. The bank finds ways to reduce the amount of risk
of non-payment with collateral, inspections or controlling documents.
Financing a startup business is different. A mortgage loan to
buy a building, a multi-year loan to buy equipment, or a loan
to carry growing accounts receivables and inventory are paid by
the long-term, basic earning power of the business.
A projected cash flow statement of the business is the best way
to plan a repayment program. It is the only financial statement
that can begin to answer the question "When?" It shows
when excess cash from profitable operations will be there to repay
the loan. Sample forms are available from the Small Business Administration.
There also are personal computer programs to help put together
this analysis. With either method, get your accountant involved.
When you need a repayment program that takes several years, you
still may have to sign a note for a shorter period. Banks like
this "exit opportunity" where they can ask you to repay
your loan or move it somewhere else. If you can not get a note
for the term necessary to fully repay the loan, ask the bank to
apply for SBA insurance or locate a non-bank, long-term SBA lender.
At least protect yourself
with a letter of agreement. The letter of agreement should
state that the loan will be renewed, if you have met the terms.
conditions and payments on the original note. You can write the
letter and ask the banker to sign an acknowledgment.
HOW WILL YOU
REPAY THE LOAN?
You can hurt your loan application by being vague and unfocused
in answering this question. The banker must see clearly how the
bank will get back its depositor's money.
Sometimes a loan is repaid with another loan. For example, a
construction loan is replaced with a long-term mortgage loan.
A loan can be repaid with an equity investment in the company
at a later date. This is fairly sophisticated lending that most
Some loans are meant
to be repaid with the sale of the pledged collateral, e.g. real
estate, cattle .
For the longer term business startup loan., the answer is more
complicated. The bank has to be persuaded of the lasting earning
power of your business. You have to show excess cash flow form
profitable operations. Excess cash is cash you don't need anywhere
else in your business. This is the only acceptable answer to this
The size and timing of this excess cash can be shown only with
a projected Cash Flow Statement. This projection must include
each of the next twelve months and quarterly projections for the
following two years. The bank must be persuaded that the cash
flow will be there, and that it will continue for a period long
enough to repay the loan.
The rationale of your financial assumptions, the experience of
other franchisees, the reputation of the franchisor, the quality
of your market research, and the persuasiveness of your financial
and emotional commitment to the startup must all fit together
to build a solid case.
WHAT HAPPENS IF
YOUR PLANS DON'T WORK OUT?
Collateral (assets that
can be pledged to the bank when the loan is made, or assets that
can be sold to repay the loan) is the traditional answer to this
question. The bank is not in the business of selling collateral
because it usually means the bank made a mistake.
you should include in your proposal the things that might go wrong.
Estimate how likely these problems are to happen. You and the
franchisor know the risks of the business better than the banker.
Evaluate the effect on your company of price-cutting competition,
overhead increases, delays in customer collections and rapid sales
growth. Explain clearly your options to correct the problem or
to reduce any possible damage. You don't want to leave the task
of predicting bad things to the banker's rich and negative imagination.
Business people are positive; bankers are trained to be doubtful
and cautious. Their training is focused largely around these seven
questions. Learn the answers for your business.
--George M. Dawson