By: Emma Pearson | <!– 1 Shares –> 243 Reads
If you have been researching automotive franchises (Get Your Automotive Franchise Business From 0 to 60 Faster By Selecting the Right One) and have identified one you believe will meet your long-term financial and personal objectives, you’re probably anxious to obtain the funds to invest in it.
Laying the Groundwork Necessary to Fund Your Automotive Franchise
Lenders strive to take on as little risk as possible. The following key factors lenders considering loaning you money will look at are known as the “5 Cs”:
- Capacity: your ratio of debt to income.
- Capital: what you have besides anticipated income that can help repay the loan (i.e. savings, investments).
- Collateral: anything you own that is of value and can be used to pay off your loan if you were unable to repay it via your income.
- Conditions: how the money will be used.
- Credit history: based on your track record of making on-time payments and how much of your credit you are using.
Before you start investigating franchise-financing options, you’ll need to take the following steps:
- Determine how much money you need. You’ll have to find out how much money you need to invest in the automotive franchise you’ve selected and live comfortably until it’s profitable enough for you to take a salary that would enable you to live in the manner to which you are accustomed. Keep in mind that the franchise purchase price is only part of the cost of the business. Additional costs will likely include land purchase, construction, equipment, fixtures, signage, and salaries for staff in addition to franchise marketing and royalty fees.
Once you know the above, you’ll have to find out your net worth, which essentially indicates whether or not you are in a strong financial position by showing what you’d have left over if you had to sell off all your existing assets to pay your current debt. Once you know how much money you have available to invest in the franchise, you’ll know how much money you’ll need to borrow in order to purchase it.
- Get your credit rating as high as possible. Start by obtaining your credit report from a credit reporting company such as Equifax or via AnnualCreditReport.com, a government website that provides free annual credit reports. If your credit score isn’t high, then implement a plan to improve it.
- Prepare a business plan, which conveys that you will be a successful franchise owner to potential lenders. Important details that should be highlighted within it include an overview of the automotive industry, a description of your business, finances, marketing, and staffing. Your franchisor may be able to provide you with a sample business plan and the Franchise Disclosure Document (FDD) will provide you with many details that should be in your plan relating to the investment and potential revenue.
Automotive Franchise Funding Sources
Once you have completed the above actions, you’ll have a better idea of where you stand financially when it comes to investing in the automotive franchise you’ve chosen. This knowledge will help you determine the best financing option for you. Funding sources you may have access to include:
- SBA loans: Many franchisees finance the bulk of their franchise through Small Business Administration (SBA) loans. The SBA itself doesn’t actually directly loan money. It simply offers partial guarantees for the loans to the banks that participate in its programs. Some franchisors say they are SBA Approved, which means they went through a formal process with the SBA in order to prove their system is viable. The end result is that when you apply for an SBA loan you will have to establish you are a good candidate for it, but that the franchisor will not be scrutinized as well. This can expedite the loan process.
- Traditional bank and credit union loans:Even with a solid business plan and collateral, most bank and credit union loans to new franchisees are only made if they have an established relationships with a banker or proven success running a similar business.
When it comes to SBA and Traditional Bank loans, you are more likely to get a loan if you are investing in an automotive franchise that is an established and successful brand with an excellent track record of loan repayment. If the franchise you want to invest in isn’t already SBA Approved, you can ask to see its data from the Coleman Report, which runs an annual report showing the SBA default rate for different franchises.
- Non-traditional channels: Online lenders such as Boefly, after you create an account with them, generate a loan request that is matched to “compatible lenders” from the lenders and banks in their system. From there, you connect with the potential lenders. If you are looking at online loan sources, avoid those that are not certified by TRUSTe or have poor Better Business Bureau ratings.
- Family and friends:There are two common ways franchisees obtain financing from family and/or friends. The first is to have them become a partner, which means they share the financial and operational load of the business as well as profits. The second is that they provide the needed funds as a loan. If your family or friends give you a loan, be sure to have them sign a contract, determine whether the money is loan or investment, and consistently communicate with them about the status of the business. The risk is that if you default on the loan it could impact relationships that matter most to you.
- Self-funding:This entails leveraging your personal assets to fund your business. You can take out a home equity loan, a second mortgage or borrow money from your savings or investment portfolio. You can also do a Rollover for Business Startups (ROBS), which enables you to invest $50K+ funds from your retirement account into your automotive franchise without paying early withdrawal penalties or taxes. Risks associated with these various actions include the potential loss of your home or retirement investment.
- Franchisor financing: Check Item 10 of the FDD to see if the franchisor offers financing options. Some provide debt financing, while others carry the entire loan or a fraction of it through their own finance company.
- Credit cards: Some franchisees partially fund their business, at least initially, with credit cards. If you opt to do this try to do so using your credit card with the lowest interest rate. Higher interest rate cards will result in your paying far more than you should have for your business unless you are able to pay your credit card off within a relatively short time frame.
There are clearly a variety of ways you can fund the automotive franchise of your dreams. Whatever financing route you choose, it’s crucial that you do all you can to protect yourself financially. One of the best ways to do so is to ensure the automotive franchise you are investing in has a track record of success and that you are not overextending yourself financially.
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