In Part I of this article, Dr. Hayes explained the four steps that franchisors can take to help prospective and existing franchisees get financed. In Part II, he explains the steps that franchisees can take to get financed.

If you’re a franchisee, or a prospective franchisee, you probably need money to open or expand your business. And unless you just arrived on Planet Earth, you know that money is scarce. Even though banks have plenty of money to lend, and they’re obviously in business to lend money, franchisees can’t have any! Or so it seems.

Actually, there are some things you can do to get banks and other lenders interested in your business. Here are six steps you can take.

1. Take a careful look at your cash position. How much money can you invest in a franchise? (If you say none, you should probably stop reading and keep your job, or get one. The days of getting into business without cash are pretty much ancient history). Lenders will expect you to have approximately 30% cash down payment, according to Ronald A. Feldman, CEO of Siegel Financial Group in Bala Cynwyd, Pa. Siegel Financial Group is well known for helping franchisees and prospective franchisees get financed.

"Take a look at the total (cash) picture," Feldman advised. Oftentimes, prospective borrowers have more resources than they think. "You want to use your IRA to fund a deal? You can. Do you have angels, friends or family who will loan you money? That helps. Can you get an equipment lease or an unsecured loan? Great. Do you want to use home equity? Be careful. If you want to use it in conjunction with an SBA-backed loan you must have other income to cover to service that debt other than what you plan to generate from your franchise," continued Feldman.

Unraveling the secrets to securing a loan is complex. Franchisees can get help from their franchisor, their accountant, CPA, or business advisor.

2. Don’t waste time on a franchise that you can’t afford! The good news is that there’s a franchise (almost) to fit every budget and lifestyle, providing you have some cash. You may not be able to secure a million-dollar franchise opportunity, or even half that much. But could you afford a service franchise for less than $50,000? Or could you be happy with a franchise that allows you to keep your full-time job and work the franchise part-time? These are questions that the prospective franchisee must answer in advance. Seek help from professionals. Be sure to talk to existing franchisees and ask them about the financial expectations, or what was required of them to secure a loan.

"If you expect to get a loan today," said Feldman, "the lenders want you to have three to six months’ personal living expenses in the bank, in addition to the money you need to secure the loan. Some lenders may only require a 20% down payment, but you need to know what’s expected early on."

3. Lenders will require a 680 minimum FICO score (it may be higher by the time you read this). "Make sure there’s sanity between your living expenses and the anticipated income from the franchise," Feldman explained. "It doesn’t matter how good your credit score is. A 680 that needs to make $65,000 a year to pay his bills is much better than an 830 that needs $300,000 a year to pay his bills."

4. Realize that lending has moved to the local community banks. "There are no preferred lenders for franchising today," explained Darrel Johnson, CEO, FRANdata in Arlington, Va. "National banks, commercial banks and non-bank lenders, like GE Capital, have essentially vacated franchise lending - and they were the preferred lenders, the primary lending source, for all of this decade." But no more.

"The local lending community is the primary source for money now," Johnson continued. "And that’s a problem for franchising. Because the local lenders are not experienced franchise lenders." They don’t know the franchise brands, or how franchises work. They don’t know where it’s safe to invest their money and they are severely risk-adverse!

"At the local bank," Johnson reported, "the credit department, which controls loan decisions, is going to ask, ‘What do we know about this brand?’ and ‘What do we know about the prospective borrower?’ and to get past those two questions the credit department has to ask itself, ‘Are we willing to take the time to answer those questions when this may be the only loan that we do for this brand or this borrower?’"

There’s the problem. The bank has no incentive to do the loan! Therefore, you need to be certain that you deliver to the bank a package that not only helps them understand your request, but also helps them get comfortable with your brand. Your chances are better if you’re investing in a wellknown brand, or an existing franchise, as opposed to a start-up, or even an existing brand.

In Part I of this article I mentioned the tools that FRANdata and Siegel Financial Group provide to lenders, the Bank Credit Report and the Strategic FDD Expansion. Lenders can rely on these documents to quickly get comfortable, or not, with the franchise brand and the overall deal. "In today’s economic environment," said Johnson, "the Bank Credit Report is almost as necessary as being listed on The Franchise Registry." When local lenders have a BCR or similar tool, they are more likely to at least consider the loan. If the prospective borrower then meets the bank’s requirements, it’s more likely that loan will be approved.

5. Get into a credit mindset! "Look at your request for a loan the way the bank, or lender, will look at it," suggested Geoff Seiber, CEO of FranFund in Fort Worth, Tx. "Becoming a successful borrower today is not like it was just a couple of years ago. You might recall that you got a car loan or a mortgage with little trouble. You filled out a form, signed a document, and the bank gave you some money. That’s not the case any more! The banks now have a bunch of bad loans - they should have done more scrutiny and now they are. Now the questions that you’re going to be asked will be different."

But don’t take it personally. No one is attacking you or your franchise brand. It’s just the way of lending today - the rules changed.

"As the bank processes your request, there will be a lot of things to do, so be prepared," continued Seiber. Respond to the bank’s requests quickly and accurately. No one is going to nurse maid you through the process. They expect you to do know what to do. They expect you to know your credit score, and they expect you to know how to respond to their questions. ‘I don’t know’ isn’t an acceptable answer. To the lender, ‘I don’t know’ means you don’t care. You must be able to tell your story, concisely and accurately, and back it up. The lender will want to know why you need the money and what you’re going to do with it, and they’re looking for specific answers.

6. Get help! "If you’ve never applied for a business loan before on your own, get help," said Feldman. "The franchisor can help you, we can help you, your accountant can help you, but don’t do it yourself. You’re not going to get approved. You must know how to package the loan and every model is different and every lender is different. It’s a waste of your time to do it without getting help."

Help is available through various sources. Franchisors and other franchisees may lend their assistance, at no cost. Your accountant may charge a flat fee to package a loan. Siegel Financial Group and FranFund charges flat fees - in the range of $1,500 -- to package a loan for a client, regardless of the loan size. Buying more than one unit of the same franchise? Don’t worry, they won’t charge an extra fee!

In closing, it’s prudent to advise you that even if you perfect all six of these steps you should not expect any miracles. "Lenders are pretty much only doing A and A+ loans today," cautioned Seiber. The good news is that lenders have historically favored franchising because of its overall success story. If you’re investing in a franchise with a good track record, and your personal financial story makes sense, you’ve got a good chance of finding the money you need to open or expand your franchise.