What You Need to Know
Before You Request a Loan

What Do Lenders Look For?

Do I Have Enough Collateral?

What If I Don't Have Enough Collateral?

How Much of My Own Money Will I Need to Invest?

How Do I Find Out About the Paperwork Required for an SBA Loan?

Selling Franchises and Earning Claims Issues

When selling franchises the franchise sales person needs to know that they cannot give any earnings claims to the prospect of franchisee unless those earning claims can be documented and substantiated through audited financial statements.

Further the franchise sales person needs to realize that there needs to be at least eight or more franchisees and a specific region where the prospect of franchisee is located at have made or earned that level of earnings, which the franchise sales person is claiming.

If a franchise sales person lies to a prospective franchisee then this is consider fraud. If a franchise sales person lies to a prospect of franchisee this can result in legal action by the franchisee and hurt the company.

Franchise companies should be well advised to stay away from franchise salespeople who embellish the story. As a former franchisor it became rather obvious that it was very hard to find a franchise sales person with the proper integrity to offer our franchisees to the public.

In fact we decided in our franchise offering circulars to not have substantiated earnings claims because we were afraid our competition would find out all of our data. This meant that the franchise sales person could not tell the franchise customer or buyer how much money they would make.

Actually this is too bad for the franchise buyer, but that government has determined that this is the proper way to enforce this issue to prevent fraud. The temptation to give earnings claims to franchise buyers prior to the sale is intense because the franchise buyers keep asking over and over again prodding for the information.

Indeed in my opinion they deserve the information that the government regulations make it nearly impossible to give the information that the buyer needs to make a proper decision.

What Do Lenders Look For?
Lenders have to ask themselves two basic questions:
1. Will the borrower be able to repay the requested loan?
2. If the loan is not repaid, how will the bank get its money back?

To answer question 1, they will examine not only your business, but you. They will check your credit history and evalute their impressions of you as a businessperson. Their main tools in evaluating your business are your past financial reports (if you have an existing business) and your business plan. Your business plan must convice the lender that the business has a solid strategy for success and will indeed be able to support the repayment of the requested funds.

To answer question 2, they will look at the collateral available. In the worst case scenario, the bank will have to seize the property you pledge to back up the loan. In all but the most extraordinary cases, if you don't have the collateral, you don't get the loan.

Do I Have Enough Collateral?
If you only have $100,000 worth of collateral, don't expect to be able to get a $100,000 loan. When banks liquidate collateral, they are rarely able to dispose of it for its market value. Depending on the type of asset pledged, they can sometimes only realize pennies on the dollar. Each bank has its own formulas, but the following guide should give you a basic idea of typical collateralizable percentages. Example: If you pledge real estate (with a collateralizable percentage of 70%) worth $100,000, that real estate will collateralize a loan of $70,000.

What If I Don't Have Enough Collatoral?
The SBA makes it clear that the lack of sufficient collateral will never be the sole reason for refusing a loan request. If your credit history, personal qualifications, business concept, and business plan are sufficiently strong, you can overcome a collateral shortfall. Contact your local SBA-certified or SBA-preferred banker and explain your situation. They can tell you what to expect.

How Much of My Own Money Will I Need to Invest?
Banks don't like to lend money to new businesses in the first place. If they do decide to lend, you can bet that they won't want to be the only ones with something on the line. Expect your banker to want you to come up with at least 25% to 33% of the total start-up funding needed. Your investment will do two things: 1) It will improve your company's debt-to-equity ratio, making it financially healthier and better able to support the requested loan. 2) It will demonstrate to the lender your commitment to the venture and insure that you remain committed to it.

How Do I Find Out About the Paperwork Required for an SBA Loan?
The SBA has done a good job recently in streamlining the loan request process. They have cut the required paperwork dramatically. Still, they haven't eliminated it entirely. Your regional SBA office should be able to direct you to the closest SBA-certified or SBA-preferred lender. The staffs of these lenders have received training in the SBA process. They can explain the various loan programs available and help you with the required paper works. That's their job. Use them.

Go Back to Resources	Go Back to OBD Home Page