Financing to Start a Business

By. Mary Sullivan

A reader recently asked about obtaining a loan to finance the start of his pastry shop franchise. He is currently training with an existing franchisee to learn the recipes and the business, and he hoped that would help him get a loan to cover the purchase of initial inventory and funds to get him through the early months until the business was self-sustaining. I contacted an experienced commercial banker and asked what weight lenders give various factors when a person applies for this type of business loan. I thought I'd share as a post what I passed on to the reader:

• Top on his list of criteria is how much of the needed funds the business owner plans to put up personally.
• Also high priority is the quality of the franchise company -- "There is a wide range of success/failure factors that separate franchises."
• Planned business location is also a consideration with lenders. "What is the growth trend in that particular neighborhood ... declining, or lots of new construction, etc.? And what is the competitive situation in the proposed location?"

• Two other considerations are: how well thought-out the business plan is, and of course, prior experience. You won't have had ownership experience, but you're getting good practical operating experience.

The reader followed up, telling me of his excellent credit rating and wondering about the proportion of start-up costs he would need personally and how much the bank would be willing to lend. I replied:

• Your excellent credit rating counts for a lot. The percentage of total funding a bank will lend you will depend on how strong are your other factors, but another big consideration is economic conditions outside your control. You've probably have heard that the impact of the current mortgage lending crisis has, to some degree, affected commercial lending; the bank where you apply may be more or less affected than another bank due to the make-up of their own loan portfolio.

• So the answer is, "It depends." Don't hesitate to speak with several banks, and find out what they'd be willing to do for you!