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Keys to Securing a Bank Loan

Expert: Russell Bates

Laura asked:

I am interested in starting a franchise business in the industry I've already been working in for close to 10 years. I would probably need $30-50,000 to begin the venture but am not sure what is my best route for financing. Is there a small business loan out there that exists if the banks consider you to have too much debt? We have a loan, mortgage and car loan. Wondering if it is possible to proceed or if the business will have to wait until the debts are all paid.

Russell Bates answered:

I couldn't tell from your question whether you are buying an existing franchise or if you are looking to franchise a business idea. If you are buying an existing franchise, much of the guesswork has already been looked after. You mention the need to borrow $30-50,000 for your venture. Have you explored ALL of the costs? If so, add an additional 10-20% of the total to cover unexpected expenses, which will undoubtedly occur.

How detailed is your business plan? Your banker or lender will want to see a well presented, well formulated plan which addresses the banks concerns regarding repayment of their loan. Make sure your plan has a complete and accurate description of what you intend to do, how you will do it, how much it will cost and how much you expect to make. If this last part sounds like the dreaded cash flow forecast, that's because it is!

If you have a plan prepared for you by a professional (accountant, business consultant), make sure you are fully involved every step of the way. Too often plans are prepared because the bank wants one. And if the entrepreneur isn't completely familiar with the plan, your credibility suffers. Remember, to the bank, YOU are the business and if you aren't confident and knowledgeable about your plan, the bank won't likely support your request for a loan.

Laura, you also ask about obtaining financing if the bank feels you are carrying too much debt. There are various government guaranteed loans which require only a minimal equity contribution from the borrower. These loans cannot be granted for certain purposes such as working capital or inventory but in any event, you will have to qualify under normal lending policies. In assessing your current level of debt, will the new business have to pay you a salary from the start in order to maintain your lifestyle? If so, is this realistic?

Having to wait until all debt is paid off may not be necessary or even wise if your intended franchise opportunity is time sensitive ­ i.e. is it technology that may become quickly outdated. Lenders may look at the amount of equity you have in your house to see if a 2nd mortgage could be pledged as collateral. You may be able to pledge the difference between the amount owing on the first mortgage and 75% of its appraised value. Banks generally like mortgage security and it shows your commitment to the business.

Lenders are going to consider how much of your own money will be going into your business. A reasonable amount is needed not only to show your commitment but also to greatly improve your chances of succeeding. Lenders are reluctant or prevented from financing certain items such as goodwill, leasehold improvements or taxes such as GST.

Don't forget there are other lenders out there- family, friends, shareholders, and partners to name a few. Also, investigate lenders such as Community Futures Development Corp. They are sponsored by the federal government and specialize in helping new businesses.

One concern I have Laura (and it's something I recommend you examine closely) is whether you are starting out on your own just to replace the job you already have or to get rid of a boss. Often entrepreneurs will take their present skills and go out on their own in anticipation of making lots of money. Many new businesses fail because of this.

You may be the best at what you do, but if you don't have the vision to see a future for your business or the managerial skills to keep everything organized, I'm sorry but your business will ultimately fail. Too many new ventures, 80%, fail in the first 5 years. Of those that survive, 80% of them fail in the next 5 years.

Depressing news isn't it? I would rather ask the tough questions now instead of seeing you invest time, money and your dreams into a business that will not succeed.

Should you continue looking into this dream? Absolutely. Seek professional assistance and ask many questions until you are confident of success. Then, formulate everything into a business plan, a plan that is the life of the business, your vision and statement of who you are and what you do!

In closing, I wish you every success! Please visit my website at and if you need any additional help, please get in touch.

About the author

Russell Bates had 28 years of banking experience plus 9 years operating a wedding photography business prior to opening his small business consulting firm, X-SELL Consulting Company Ltd.

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