YOU WANT TO KNOW HOW TO FINANCE A FRANCHISE IN CANADA!
FUNDING YOUR FRANCHISE WITH THE RIGHT FRANCHISE FINANCING SOLUTION
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Financing & Cash flow are the biggest issues facing businesses today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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INFORMATION TO FINANCE A FRANCHISE PURCHASE IN CANADA
How much does it cost to finance a franchise - do you qualify and what are the risks around financing franchises? Let's dig in!
How to finance a franchise in Canada becomes an immediate and looming decision # 2 for aspiring business owners, right after your having made that choice #1 to enter this industry as an entrepreneur/business owner.
UNDERSTAND WHAT IS FINANCEABLE IN YOUR FRANCHISE PURCHASE
But what about the financing costs for yourself, the new franchisee? What is financeable, what is not, and who can you turn to for help, guidance, etc?
Naturally, it goes without saying that the actual financing of your new business can be the difference between making it... and the other less-than-favourable option... failing.
THE BASICS OF BUYING A FRANCHISE
Let's examine some key franchise basics for the Canadian entrant into the industry. Where is that financing going to come from? It general it boils down to two parties, you with some type of equity/down payment component and a financing partner. That financing partner can potentially be two finance firms, one specialized firm, or traditional financial institutions such as a bank. More about the bank later... and trust us, it's good news!! Not what you might be thinking!
FRANCHISORS THEMSELVES DO NOT PROVIDE FINANCING - THEY SELL FRANCHISES!
In relatively few cases, some franchisors might offer in-house franchise finance options for potential franchisees / new franchise owners who are looking for franchise finance assistance.
But you will notice that we have eliminated one party that many new franchisees think they are going to get help from, and that’s the franchisor! The reality is that although some indirect help should be expected you should not expect a cheque from them to help finance the franchise. Why? They are in the selling business, not the finance business, as simple as that. Their focus is geared toward marketing support and operations.
HAVE A BUSINESS PLAN AND CASH FLOW PROJECTION READY!
It's important to spend some time in your business plan (yes, correct, you heard right ... you need a business plan) to give some thought to and break down the actual components of the franchising costs. Those categories are typically assets, working capital, leaseholds and franchise costs. In some larger franchise purchases, there might even be a real estate component to your deal, but that’s a bit rarer. Oh and don't forget that franchise fee!
At 7 Park Avenue Financial we prepared those business plans and cash flow projections, at a reasonable cost, and these documents are critical to successful financing.
Once you have your breakdown in front of you it’s critical to start to determine what is financeable and what is not, and then focus on who is going to finance those components.
THE FRANCHISE FEE
Typically the franchise fee was not financeable in Canada... in essence, we can call it the goodwill component of your balance sheet, just as it would be in the purchase of a business in a non-franchise industry. However the CSBF program now allows for the funding of franchise fees, and that ties nicely into our next point, which is simply that your down payment or equity part of the deal typically now does not require financing. In a typical franchise in the 350k range in Canada, we tend at 7 Park Avenue Financial to see franchise fees in the 25k range. Repayment terms are flexibile and under a term loan structure.
Many business owners focus only on the cost of the franchise and getting to the goal line on their purchase. They forget however that sales don't necessarily start strong on day 1, and your fixed costs and payroll can catch up with you pretty quickly.
So don't forget to take a hard look at the working capital component of your deal, which should be thought about, and addressed! in the business plan. Naturally working capital in the retail industry is a lot less of a requirement than in a non-retail business ... it’s the difference between a cash business and waiting for someone to pay you.
FRANCHISE FINANCING OPTIONS
Many franchisees ask if traditional bank financing is offered via commercial loans from Canadian banks - banks of course have the lowest and most sought-after interest rates in Canada - The reality is that a traditional loan to secure franchise ownership via a bank can be a lengthy and time-consuming process.
THE GOVERNMENT SMALL BUSINESS PROGRAM IS .. PERFECT FOR FINANCING A FRANCHISE!
In Canada, there are only 1 or 2 specialized franchise finance firms that entertain the full financing of your franchise. If you don't qualify for that scenario, or if your franchisor is not part of that program a solid solution is the BIL/CSBF loan program. It's a government-guaranteed loan that allows you to finance equipment, leaseholds, equipment and even commercial real estate up to 1.2 Million dollars, which covers a large majority of costs in most franchises. And by the way, interest rates, terms and structures are excellent, and you don’t even have to personally guarantee the full amount. Personal assets are not taken in the federal loan program, which is a benefit to many franchisees. Additionally, the loan program now includes line of credit options.
Many potential franchisees ask ' how to finance a franchise with no money ' and this is rarely possible if at all as franchisors and banks and commercial lenders offering traditional financing options want to see a personal financial commitment from the buyer - the proverbial ' skin in the game. Your own equity position is key to your overall finance structure in the business. Home equity loans are often taken out by franchisees to fund their personal investment in the business as well as the ' friends and family ' option or alternatively seeking business partners.
CONCLUSION - SOURCES OF FUNDING FOR FRANCHISES
Focus early on relative to your challenge of how to finance a franchise in Canada. Your business plan is key, as is your choice of financing partner or assistance. Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist aspiring franchisees with their financial needs as new entrepreneurs and small business owners in this major Canadian industry segment.
FAQ: FREQUENTLY ASKED QUESTIONS/ MORE INFORMATION /PEOPLE ALSO ASK
Can you get a loan to finance a franchise?
Opening a franchise requires business capital. When it comes to ' how to get a loan ' to buy a franchise purchasers should consider government-guaranteed business loans, traditional bank loan term loans for business acquisition, as well as non-bank commercial lenders. Buyers should be able to demonstrate a good personal credit rating as well as provide a business plan. Government SBL loans, which are the equivalent of U.S. SBA loans, have competitive interest rates - and many banks offer a franchise loan calculator to allow buyers to forecast monthly payments. Franchise financing Canada is a niche segment in Canadian business financing - franchisees wondering ' how much can I borrow for a franchise' should consult an experienced business financing advisor. Franchisor financing is rarely an option.
What are the most likely sources of funding for a franchise?
When purchasing a franchise business most prospective franchisees wishing to become franchise owners will typically require more than one time of financing as opposed to just one commercial bank loan/ credit union loan, i.e. traditional financial institutions , or the Canada Small business financing government loan for small business loans is the Canadian equivalent of the U.S. SBA loan. Franchisor financing for the franchise owner is rarely directly available as the ability of offer in house financing is not the forte of franchisors.
Venture capitalists may sometimes be involved in large takeovers of franchisors themselves, of funding master franchise agreements- Equipment financing via leasing companies or bank loans for equipment under a term loan structure are often accessible.
Various alternative lenders may provide working capital financing or short term working capital loans based on a formula of sales and a focus on the personal credit history of the franchisee. These are alternatives to traditional financing options such as business lines of credit. Project costs around leasehold improvements can be funded under the SBL loan process. A separate bank loan to finance real estate is usually a separate transaction for small businesses where the franchise agreement involves the purchase of real estate .
What credit score is needed for a franchise?
Franchise agreements with franchisors will typically require a good personal credit history of the purchaser who wishes to have their own business under the franchise model. Prior to seeking franchise fees franchisors typically perform a review of the financial history and busienss background of the purchaser and they are looking for a good personal credit score in the 650 or higher range to validate successful franchise ownership under the franchisors proven business model . Many franchisors will review net worth statements around personal assets and the ability of the franchise to be successful in obtaining franchise loans under the franchise ownership model.
Is it hard to get a business loan for a franchise?
It can be difficult for some franchisees to meet financing requirement of a financial institution such as banks and franchisors around the amount of start up funds needed - Bad credit history will deter a franchise loan or franchisor approval if there is a negative financial situation.
What is the biggest hurdle to purchasing a franchise?
There are numerous challenges in buying a franchise including challenges in obtaining capital, selecting the right franchisor and business model, as well as avoiding non compliance consequences around the franchisor business model. Obtaining working capital for ongoing cash flow needs is important , and numerous business models present employee hiring challenges . Statistics show that approx 12% of all franchisees experience financial failure of the need to sell a franchise.
Click here for the business finance track record of 7 Park Avenue Financial
