More than one-third of Americans have a credit score under 650, which is below the cutoff point at which an individual is considered subprime and will have difficulty obtaining a loan. While franchisors consider a number of factors when making a decision about a certain candidate, many applicants wonder how important their credit score will be. The answer? It depends.
Franchisors want applicants to succeed - they are not looking to turn anyone down, they just want to make sure that an applicant has what it takes to succeed within their system, Entrepreneur magazine writes. With this in mind, credit history is an important factor. It will not only affect a franchisee's relationship with the franchise, but also a variety of vendors he or she will be working with.
To begin, any franchisee will need access to a significant amount of capital to get his or her unit up and running. This means that an individual will need to qualify for a loan or be able to set up multiple lines of credit to support the operation of the unit. The first thing any lender will do is order a credit report. If the franchisor sees this as a barrier to raising the necessary funds, they will let an applicant know right away.
A potential franchisee will also need to be able to secure a lease for the location of the franchise unit. Most leases require future tenants to make a personal guarantee. Prior to accepting the guarantee, landlords will run a credit report, which, if it is poor, may disqualify an individual's application.
Additionally, many unit owners will participate in trade credit programs with vendors and suppliers, although a bad credit history may preclude franchisees from getting approval.
However, past credit problems can be overcome and should not discourage interested individuals from investigating owning a franchise. If an individual has had past issues, but they were small and a long time ago - about five years or more - they probably will not pose a problem.
No matter what, an applicant should always disclose this information to the franchisor. Franchises who do their due diligence will find out anyway, and an applicant is less likely to be turned down if he or she was upfront from the beginning. Franchisors and vendors understand that individuals go through tough periods, but as long as they worked to fix the problems and reestablish a record of financial responsibility, there should be nothing standing in their way.
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