Buying a Franchise with Bad Credit

Buying a Franchise with Bad Credit - Usually, it's easier to get a bank loan to buy a franchise than it is to start your own business, but that doesn't mean it's easy if you have poor or bad credit. Franchisee prospects should consider a microloans.

Microloans were designed for unbanked borrowers but, with flexible terms and eligibility requirements than either a conventional bank loan or a 7a loan backed by a SBA guaranty. The only catch is that microlenders charge higher interest rates, possibly between 8% / 16%, which compensates the risk.

While the $36,000 to $49,000 available through a microlender wouldn't be nearly enough cash to finance a capital-intensive franchise like a hotel or a retail store, it's within reach of the initial investment required for many home-based or service-oriented franchises.

Who is a good candidate for a microloan program? Microloan programs focus on clients that have already been denied by a bank. Typically, it's for someone seeking a loan of $50,000 or less. A good candidate has some level of expertise or technical experience in the business they want to start, but they've never owned or run a business before.

If they had a credit score over 700, they could probably get a signature loan at the bank. Usually, they have collateral items that banks typically don't want, like restaurant equipment, or it might be a service business that doesn't have a lot of collateral, but they can contribute something to the business in terms of capital it doesn't have to be very much, a couple thousand. And the last piece of it is that their business idea has validity they've really researched it.

What about franchises? Franchises are usually a really good bet, from the perspective that they have a good business plan they have a dependable history. Most thik of franchises as fast-food restaurants but, can't start for $50,000. However, there are some microlending for Merry Maids franchises or other service-oriented franchises that are possible to start with less than that.

The SBA does require that franchises be approved, but if it's not already approved, it's a pretty easy process to get them vetted for lending. Microlending is not for direct-marketing, pyramid like franchises, no Mary Kay Cosmetics, no Tupperware or Amway.

What if you have a previous bankruptcy? Most banks will not finance you with a bankruptcy at all. They might look at you after seven years, depending on the circumstances. There's a difference between having a bankruptcy because of poor credit-card management and a bankruptcy because of a death or a medical issue or something of that nature.

Microloan programs are unique because they can provide loans for people with credit scores in the low 500s, and even high 400s.

If your credit score is less than 600, you need to be able to explain why it's poor, and it's best to be truthful. If it's poor because you made bad credit decisions, you need to say that. If it's poor because of a bad relationship with a boyfriend or husband, you need to say that. In other words, don't try to hide.