I'm looking for some advice on getting a business loan for a new franchise business that my spouse and I plan to start. We just completed refinancing in order to free up the funds for the franchise fee and what we ended up with were new mortgages on our house and cabin, and two lines of credit for the equity from each. The way it worked out is that we actually received all the equity cash instead of just an open credit line. So here’s my first question…will a bank look more favorably on us if we just have that money in the bank and our equity maxed, or if we paid off the credit lines right away so we just have available credit, or lastly, if we paid them off and closed them so we just have equity?

My second question is what expectations can we have for qualifying for a loan? The larger the loan, the larger the facility we can lease, and the greater income potential. If we want a loan for $300K and have $100K cash (or equity per above), one income at $100K, and 700-800 credit ratings, is a bank willing to loan us $300K or will they only loan what we have in collateral?

Thanks so much for the advice!

Well….. it depends!

I am going to tell you what I like to see.

1- I like to see cash and equity in the project that I am financing. I don’t care about your personal residence equity at all unless I am getting to place a lien on it. In my state, your personal residence is protected unless you specifically pledge it.

2- I do not care so much about your personal debt service, but then again I am not a small business lender that looks at a global cash flow. As long as that 100K income remains, you are probably going to be able to cover the personal debt service {read the mortgage loans}. Anybody looking at this is going to look at a global cash flow, and if you are quitting your job, then everything has to be repaid with the cash flow from the business.

3- While being a franchise is a good thing {specially if we are talking about a established franchise}, most bank lenders will not consider the request due to the startup nature of the business. However, there are a couple of avenues you can consider.

a- lenders that work with the company setting up the franchisees. I know that there are some banks and equipment leasing companies that work closely with Subway as an example.

b- SBA and other agencies are a good place to look for financing guarantees or straight financing.

Good luck