How Important Are Credit Scores in Franchise Financing?

What Role Does Your Client’s Credit Play When Seeking Franchise Financing?

The Role of Credit Scores in Franchise Financing

Credit scores play a major role in franchise financing, shaping your client’s ability to secure loans, the terms they get, and the overall financial health of their franchise business. Grasping how credit scores impact financing can help better prepare your clients for loan applications and improve their chances of getting favorable terms.

Lenders use client credit scores as a way to assess the risk of lending money to each borrower. A higher credit score generally means you're seen as a lower risk, making it easier to get loan approval. Most lenders have a minimum credit score requirement for franchise loans, including SBA and Unsecured Bank Loans. If your score is below this threshold, it might be challenging to secure the financing your client needs.

When it comes to interest rates, lenders often use a system called risk-based pricing. This means the interest rate you get is based on your credit score. If you have a high credit score, you're likely to qualify for lower interest rates. Lower rates reduce the overall cost of borrowing, making it more affordable to finance your franchise. On the flip side, a lower credit score can lead to higher interest rates, increasing your borrowing costs.

Your credit score also affects the terms of your loan, including the repayment period for unsecured loans. Borrowers with higher credit scores typically get more favorable terms, such as longer repayment periods and lower monthly payments. If your credit score is on the lower side, you might have to provide additional collateral to secure the loan, which adds another layer of complexity and risk. Lower scores will typically prevent a client from obtaining unsecured loans since there are no collateral requirements.

A high credit score can also enhance your borrowing capacity, allowing you to secure a larger loan amount for your franchise investment. Alternatively, a lower score may limit the amount you can borrow, potentially affecting your ability to finance the franchise adequately.

Building and maintaining a strong credit score is extremely important for borrowers and involves a few key practices. One of the most effective ways to do this is consistently making on-time payments. This applies to all your credit accounts, like credit cards, loans, and even utility bills. Late or missed payments can seriously damage your score, making it harder to get favorable financing terms.

Managing your debt levels is another important factor. Keeping your debt utilization ratio low—this is the amount of credit you use relative to the credit available to you—can positively impact your score. Aim to use less than 30% of your available credit. Unsecured lenders also look at individual credit card utilization and prefer utilization to be at 25% or less per card. Paying down existing debt can also improve your credit score and enhance your financial profile in the eyes of lenders.

Regularly monitoring your credit reports from the major credit bureaus (Experian, Equifax, and TransUnion) can help you spot and address any errors or discrepancies that might negatively impact your score. Setting up credit alerts is also a good idea to stay informed about changes to your score and catch potential issues early.

Establishing a solid credit history involves opening and responsibly managing various types of credit accounts, such as credit cards, loans, and lines of credit. The length of your credit history is also very important and influences your score, so maintaining long-standing credit accounts in good standing can have a positive effect.

At Flourish Commercial Capital, we get how crucial credit scores are in franchise financing, particularly with unsecured bank loan financing. Our team can assess your client’s current credit situation and help improve their score, enhancing their ability to secure favorable financing terms. Whether you're starting or expanding your franchise portfolio, Flourish Commercial Capital is here to support you every step of the way.