Let’s Talk Franchising!

It’s true that 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—especially if you have less-than-perfect credit. But for potential franchisees who been turned down by traditional banks, a microloan could be the answer.

Microloans are designed for borrowers who would be otherwise “unbankable,” with more flexible terms and eligibility requirements than either a conventional bank loan or a 7(a) loan backed by a Small Business Administration (SBA) guaranty. The only catch is that microlenders charge above-market interest rates, typically between 8% and 16%, to compensate for the additional risk involved.

While the $35,000 to $50,000 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. To find out more about landing a microloan for a franchise, BusinessWeek.com spoke to Lori Kravets, executive director of the Growth Opportunity Connection in Kansas City, Mo., a nonprofit contractor in the SBA’s microloan program that also administers several regional and local loan programs. Edited excerpts of the conversation follow.

Who is a good candidate for a microloan program?

Microloan programs focus on clients that have already been denied by a bank. In our case, it’s someone seeking a loan of $50,000 or less (other SBA-backed microloan programs lend amounts up to $35,000). Typically, a good candidate has some technical experience or expertise in the business they want to start, but they’ve never owned or run a business before. Usually they have what I’d call an average credit score—in the mid 500s or 600s—but not a high credit score.

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 history that’s somewhat dependable for us to look at. When we think about franchises we usually think about fast-food restaurants, and generally you couldn’t start a restaurant for $50,000. However, we have used microlending for franchises like Merry Maids 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. See approved franchise at the FRANdata Registry

Read the Whole Story, by Kerry Miller. Kerry Miller is a New York-based BusinessWeek staff writer covering startups and small business. Miller is a graduate of Brown University.