A good credit score is crucial when it comes to purchasing a franchise. Credit ratings reveal a great deal about how people have handled their money in the past. A Franchisor can find out how long an individual has been using credit to make purchases by looking at their credit record.
According to state laws, applicants are evaluated based on several factors, many of which are visible to the public. The credit score is one such factor. The higher the credit score, the more likely an applicant is to be approved for a franchise license.
This means that people with high credit scores are more likely to get approved for franchises as compared to people with low credit scores.
What is a Credit Score?
Credit scores are a measure of your creditworthiness. The higher your credit score, the better your ability to get loans and other financial products. However, credit scores can be negatively impacted by factors such as late payments, bankruptcy, foreclosure, and other credit problems.
When you apply for a franchise, your credit score plays an important role in the evaluation process. If your credit score is low, you may be denied a franchise opportunity because of your limited financial resources and/or poor credit history. On the other hand, if your credit score is high, it may improve your chances of obtaining a franchise.
Important Credit Score on Buying a Franchise
Most well-known franchisors receive a flood of applications from people interested in joining their business. Many of these Franchisors go through these applications and contact only those who match their Franchising criteria. So, it is better to do your research before getting into purchasing a franchise in order to avoid any major problems.
Furthermore, a Franchisor can check to determine if an applicant has ever taken out large loans, such as a mortgage or a car loan, and whether or not these loans have been repaid. Franchisors value a great track record of debt repayment. They prefer to consider those who have a track record of good financial management.
When a franchisor examines a prospective franchisee, one of the most important factors to evaluate is how successful that person will be in business. When making that decision, a number of factors are to be considered, one of which is your personal credit history.
What is a Good Credit Score?
According to Experian.com, the majority of credit scores range between 600–750. The site also indicates that a credit score of 700 or higher is considered good credit. Many franchisors state that they are searching for people with good credit, therefore if you’re trying to be a franchisee, you need to have a credit score of at least 700. A candidate with a credit score of less than 700 is usually not instantly dismissed. Most franchisors generally want to work with people who have credit scores less than 700 if they have a compelling explanation for it or if other aspects of their application make them a viable fit.
However, if the credit score of an applicant is less than 700, it’s better for them to be prepared to explain the reasons for a lower credit score and what measures they are taking to improve it. A credit score of over 700, on the other hand, does not guarantee approval. If your credit history shows that you have a lot of debt, a bankruptcy, or other negative information on their report, this could raise a red flag for a Franchisor and prevent them from moving forward with the agreement.
How A Bad Credit Score Affects Your Ability to Purchase a Franchise
A low credit score does not mean that you will be denied credit. It simply means that you may have to jump through a few additional hoops in order to get into their system and obtain the franchise of your dreams. Here are some of the obstacles you may face along the route that will affect your ability to purchase a franchise:
- Difficulty in Getting a Loan or a Lease
When you make a decision to purchase a franchise, you may be required to apply for a small business loan to fund your new venture. Also, you may require a lease for the premises to start your venture if you are not getting into a home-based franchise. If you don’t have good credit, getting a loan or a lease can be difficult.
It’s a good idea to produce a well-structured business plan and prove your ability to acquire the funding to convince the franchisor that you’re able to establish a successful business. If you’re still unable to obtain a loan, it’s critical that you inform the franchisor. After you’ve put in the effort, you might be able to find alternatives to typical finance programs.
- Higher Interest Rates
In some cases, a bank can provide you with the loan that you require to fund your franchise, but you can be charged a higher interest rate for that. In such cases, you may end up making higher monthly installments.
However, it’s better to examine your projected monthly costs and earnings as you analyze the franchise opportunity. Despite the increased interest rate and monthly payments, the investment may still generate a considerable profit in the long run.
- An Infallible Business Plan
When you decide to purchase a franchise, it is likely to be a renowned and successful brand. Therefore, as the brand is well-known and demand is great, certain franchises instantly begin to thrive and are effectively poised for success. Others take some time to get their feet off the ground.
If you have bad credit, make sure you can afford your monthly payments by calculating the costs of getting started as well as how quickly you expect to make money. It’s a good idea to get a sense of what’s going on in your target market and speak with other franchisees who have recently purchased the same franchise to approximate this. These insights can help you anticipate what to expect, preventing you from going deeper into debt or damaging your credit.
Generally, the majority of small businesses are franchised, which means that they’re owned by a larger company. As a result, the business must be licensed and regulated by the state in which it operates. In order to obtain a franchise license, each business must submit an application to the state agency that controls it.
Every day, thousands of people apply to become franchisees, and many of them are turned down for one reason or another. However, a person’s credit score can have a significant impact on whether or not a franchisor will consider contacting them.
Improving your credit score is a fantastic objective to have, especially if you want to apply for a loan to make a large purchase, such as a new car or home, or if you want to qualify for one of the top rewards cards available. When you start taking action to improve your score, it can take several weeks, if not months, to see a substantial difference.
Some of those unfavorable marks may require the assistance of a credit repair organizations. However, the sooner you start working on improving your credit, the faster you’ll notice results.
Why is Credit score important to Franchisors?. (2022). Retrieved 16 June 2022, from https://www.betheboss.com/blog/why-is-credit-score-important-to-franchisors/
Pennington, A. (2022). How Credit Affects Your Ability to Buy a Franchise – Getting a Franchise Loan – Entrepreneur.com. Retrieved 16 June 2022, from https://www.franchise500.com/article/76862
Credit Score. (2022). Retrieved 16 June 2022, from https://www.investopedia.com/terms/c/credit_score.asp
How Bad Credit Impacts Your Ability to Buy a Franchise | FranchiseDirect.com. (2022). Retrieved 16 June 2022, from https://www.franchisedirect.com/blog/how-bad-credit-impacts-your-ability-to-buy-a-franchise
DeNicola. (2022). What Is a Good Credit Score?. Retrieved 16 June 2022, from https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/
(2022). Retrieved 16 June 2022, from https://www.equifax.com/personal/education/credit/score/what-is-a-good-credit-score/#:~:text=Generally%20speaking%2C%20a%20credit%20score,length%20of%20your%20credit%20history.