Your credit score, what you can borrow, and what it can be spent on

The score is a gate, not a price

For most first-time buyers the route is a bank loan guaranteed by the US Small Business Administration — usually its 7(a) programme. The SBA itself does not publish a minimum personal credit score for 7(a) borrowers. Individual lenders set their own floors, and in practice many want to see a personal score somewhere in the high 600s or above before they will look seriously at a first-time operator.

Lenders also run a small-business credit score that blends personal credit, business data and the application itself. You cannot see it and you cannot dispute it. What you can do is make sure the personal credit feeding it is clean well before you apply — errors take weeks to correct and there is no fast path.

Treat any specific threshold you are quoted, here or anywhere else, as a lender's habit rather than a rule. They vary between banks, they move with credit conditions, and a broker who states one as fact is telling you about their sales process rather than about lending.

You will be putting in more of your own money than you expect

Franchise lending is not a mortgage. Lenders expect meaningful borrower equity — commonly something in the range of a fifth to a third of the total project, with more asked of first-time operators and less of experienced multi-unit owners with a track record.

They will also usually want a personal guarantee, and for larger loans a lien on personal assets including your home if you have equity in it. This is standard and it is not negotiable at the small end of the market. It is also the point at which the downside stops being theoretical, which is why it is worth reading the exit guide before you sign anything.

What the money can actually be spent on

A franchise loan is generally raised against the whole project rather than against the franchise fee alone, and the fee is usually the smallest line in it.

• The initial franchise fee — Item 5. Normally payable in full at signing, and normally non-refundable.
• Build-out, fit-out and leasehold improvements — usually the largest single line for any premises-based concept.
• Equipment, signage, technology and the opening inventory the franchisor specifies.
• Working capital for the opening period. Ask for more of this than the model suggests; it is the line that runs out.
• Real estate, if you are buying rather than leasing — often financed separately and on different terms.

Before you apply

Pull your own credit reports and correct anything wrong on them. Assemble two to three years of personal tax returns, a personal financial statement, and a business plan with a cash-flow forecast that runs past the point where you expect to break even rather than up to it.

If you are considering funding the equity by rolling over a retirement account, get independent tax advice from someone who is not being paid a commission on the transaction. The structures that permit it are legal and well established, and they also put your retirement savings inside the business you are about to guarantee personally.