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When The Bank Says No

We recently wrote about how small business owners are increasingly seeking alternative access to financing, when the bank says no.
Even if you perfect your pitch, formulate your figures and balance the books, sometimes something larger than you can come between your dreams of business ownership, like the credit crunch. Here at Franchise Direct we realise than unexpected problems crop up when you least expect them, or at the most critical times. Being turned down for a business loan can be a spanner in the works.
In the  “Access to Finance 2007 and 2010″ report we mentioned last week, there was an increase in the non-traditional methods of financing small business owners are using to get the credit taps pumping again.
If you’ve found yourself being refused a loan to start your franchise business, don’t fear, you’re not done trying yet.

  1. Ask your franchisor is it possible to pay in installments, instead of a lump sum investment. For many businesses this just won’t work, but if your preferred franchise doesn’t involve buying and selling large amounts of stock it may be an option.
  2. Consider less expensive franchise opportunities. If you want to start a web design business, but are prepared to go without some of the supports and packages of some more expensive businesses, a cheaper option might work for you.
  3. Shelve the idea of buying a franchise for a few months,and save up to invest without having a loan hanging over your head. A little bit of extra time will give you the time to make sure this really is the path you want to take.

Consider borrowing money from friends or family.

This is happening more and more, as the “Access to Finance 2007 and 2010″ report revealed. If you decide to go down this path, there are a few crucial things to keep in mind:

  • Research current interest rates and the tax implications of borrowing from a family member. Even if you agree not to pay interest, the taxman might still expect a payment from income earned through interest from your lender.
  • Be realistic. Discuss a feasible payment schedule. Every penny counts in the early days of a new business, so high loan repayments might be a cross your business won’t be able to carry. Will you be paying interest on the loan? Over what period will you pack back the loan?
  • Contract. Whilst an IOU on the back of a napkin is not a suitable place to put your loan agreement in writing, writing a promissory note (informal contract) is not a very complicated process. The document should outline the amount of the loan, the interest rate(s), the term of the loan, what will happen should the loan not be paid back and collateral (if any). Make sure the document is structured, signed by both parties and a witness and that you keep a copy. You can download a sample contract online. However for loans involving large sums of money it is advisable to seek legal advice.
  • Taxes. File all the relevant documents  that apply to your loan for tax purposes, you may also have to make these available to your lender.
  • Relationship. When it comes to discussing matters related to the loan, it is absolutely vital that you try to maintain as professional a relationship as possible. Keep your payments on time up-to-date with the contract requirements. Your relationship will suffer otherwise.
  • Communications. Equally, if you run into difficulties with the loan, discuss repayment options with your family member. Banks often restructure loans for customers struggling to repay. This should be a last resort.
  • Your business. Make it clear from the onset that this is your business, and a loan is not a free reign for your family to criticise and give unwanted advice, unless you want their opinion. Blowing your loan on fast cars, loose women and scratch cards could give them cause for concern, so avoid squandering the money.
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