The Importance of Credit Score in Franchising

Individuals frequently ask us about how to franchise my business. There is a process that we have developed over the last several years of helping over 500 companies franchise their businesses. One of the most important first steps in the qualification process is obtaining your credit score.

The key components of success in franchising are similar to other businesses like the real estate market, for example. This blog post discusses the importance of a credit application in the process, using the housing industry as an example and explains how it is helpful to get a credit check before filling out an application to purchase a franchise.

The housing industry provides a “Pre-Approved letter” to show a seller that a buyer is qualified and also to show how much the potential homebuyer is capable of funding. The pre-approval gives great guidance to the realtor in showing the right set of homes that the buyer can afford. Savvy realtors use this purchasing-power knowledge to close deals. Using the buying power to show seriousness and at times, helping a buyer reach a little higher.

Buying a home is a very common experience. Buying a franchise is not. Franchise buyers trying to reach at the franchise fee will soon be disappointed. Once they realize that the fee is only part of the capital requirement; the candidate will also need operating capital, advertising funds and living expenses.

Unlike the home buying experience, the franchisor needs to ensure that the potential new franchise owner has enough money to run the business and generate sales. Each brand will require a defined set of capital requirements provided by the franchisor. Living expenses are determined by the candidate and should be validated by the significant other.

How Franchise My Business: The Application Process:

We are firm believers that, “It’s not what you say, it’s what you do”. Submitting an application is a great step in proving to a Franchisor that you are a “DOER”, not a “TALKER”.

Completing the application shows the following:

  • Your finances are in order and organized.
  • You are organized and diligent.
  • Your words are validated and you have taken the first step in establishing trust.
  • You spoke with your spouse/significant other/partner, about investing in a franchise. They will need input or in the case of a partner, a separate application.

In addition to the information in your credit report, the application to purchase the franchise will normally ask you to provide details on your net worth, assets, employment history and personal references.

Credit Score

Getting your credit score accomplishes more than just proving your credit worthiness.

It shows the franchisor:

  • You understand the leverage of the ability to pay, with the ability to borrow.
  • You pay your bills on time.
  • You buy what you can afford.
  • You care about your reputation and you protect your name (brand).

Knowing his or her credit score will help the franchisee in understanding their ability to use borrowing power for business expansion. Knowing a franchise candidate’s credit score will help the franchisor determine if you are creditworthy and capable of getting vendor credit.

Your credit score can be obtained for free by visiting any of the top credit score websites such as freecreditscore.com or annualcreditreport.com. We hope that this answers some of your initial questions on how to start a franchise.

In conclusion, once an application is in and scores are provided, a true negotiation can begin. We are firm believers that you put all your cards on the table, especially when your hand has 4 Aces! Bluffing works in poker, NOT in franchise investment.

For a free consultation on How to Start a franchise click here.