How To Determine If You Are Financially Healthy Before Investing In A Franchise - Part 1

Part 1 of 2 You performed your due diligence, analyzed the statistics on success, and have determined that purchasing a franchise is the best way to become a business owner. The next step is to find out how and where to obtain the financing to acquire the franchise. You must also consider the fact that you will need money to pay for royalty fees, purchase inventory, and have some working capital on hand at all times. Like any business, it will take some time in order to ramp up. You may not experience a positive cash flow in the beginning, this is to be expected during the ramp-up period. You need to be prepared for that from a financial standpoint. Prior to approaching any lending resources, it is important to verify that you are on stable financial footing. The following information will provide you with a few ways to determine that you are financially healthy before applying to finance a franchise purchase.

1. Calculate Your Net Worth

Determining your financial health begins by calculating your net worth. You should use a personal balance sheet that lists your assets and your liabilities. Under the assets column, list the amount of cash you have on hand along with the amount of money in your checking and savings accounts. You also need to list the amount of equity you have in real estate, current market value of automobiles, securities, investment accounts, insurance cash values, and any other valuable assets you own such as jewelry. Follow the same steps for the liabilities column. List your current bills such as rent/mortgage, automobile loans, personal loans, credit card balances, or any other loan-related item that will appear on your credit report. You do not need to list utilities. Add up both columns and then subtract the total amount of liabilities from the total amount of assets. The result is your net worth.

2. Ascertain Your Credit Rating

Stability, income, and track record are the three common factors that most lending sources scrutinize over when calculating your credit rating. They are interested in knowing how long you have been at your current and past jobs, how long you have lived at your current address, and whether you have a record of finishing what you start. If your past does not show a solid history of stability, be prepared to explain the reasons for that. It is always a good idea to write the reasons down in a letter of explanation. The amount of income that you earn is important, however, it is just as important to show your ability to live within the means of that income. For example, some people that earn $150,000 per year cannot pay their debts, while other people that earn $50,000 per year are able to budget adequately. There is a good reason why lenders consider your income and the way you live within that income. People that fail to properly manage their personal finances are far more likely to fail at managing their business finances. The third piece of the credit rating puzzle revolves around your track record of making timely payments on debt. If you have a history of delinquent payments, charge offs, automobile repossessions, or real estate foreclosures it is crucial to fix these issues prior to applying for a business loan. Lenders will typically review your credit report in order to track your creditworthiness. It is a good idea for you to review your credit report prior to applying for the loan. If there are any negative items being reported, you should either hire a professional credit repair agency or fix the issues yourself before filling out a loan application.

To Be Continued... How to Determine if You're Financially Healthy Before Investing in a Franchise - Part 2

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