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How To Buy A Franchise In Canada - By Stan Prokop - 7 Park Avenue Financial
Franchise financing in Canada has some major similarities to the U.S. market but is different in some key respects. This article will explore some of the similarities and differences that we have observed in the marketplace around a franchise loan.
WHY BUY A FRANCHISE?
More and more entrepreneurs are, of course, looking at franchise financing for a combination of both employment and entry into entrepreneurship under a reduced risk mode. That is to say that a proven franchise concept enhances chances of business success.
WHAT ARE THE GOALS OF A FRANCHISEE
The potential franchisee has chosen his business and has hopefully prepared either on his own or with professional help a business plan that ultimately has two purposes: to finance the venture successfully, and secondly, to monitor long term progress against initial goals and projections and assumptions.
WHAT ARE FRANCHISE LOAN REQUIREMENTS - WHAT YOU NEED TO KNOW ABOUT FINANCING A FRANCHISE
How to fund a franchise? We get that one a lot at 7 Park Avenue Financial. The business plan, when properly done, will allow the financing requirement to 'fall out of the financials. That is to say that proper opening balance sheets and cash outlays will identify the total financing needed. The financials need to be specific in this area. 7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements.
THE GOVERNMENT OF CANADA GUARANTEED BUSINESS LOAN
In Canada, most franchise financing in business loans is done under the CSBF loan program's auspices. This is the equivalent of what our friends in the U.S. call the SBA ADMINISTRATION. CSBF stands for:
Canada Small Business Financing program and is a federal government program under Ottawa's auspices.
The important point here is the government has allowed the Canadian chartered banks to ' administer ' the program. The government, in effect, 'guarantees' the loan to the banks that participate in the program.
Franchise loans under the CSBF program have excellent rates, terms, and structures. These are 3% over prime rate, 5-7 year terms, and flexible payment and repayment schedules which are welcome when starting a franchise and financing your franchise with debt.
In the current economic crisis and market turmoil re the Pandemic etc., many banks have either altered their view of certain elements of franchise financing, or in some cases, have pulled out directly from certain business segments that they view as too risky, or in which they carry too much exposure. The restaurant/hospitality industry is a good example. A vast majority of franchise financing is done for the Canadian restaurant and hospitality industry.
WHAT DOWN PAYMENT IS REQUIRED IN A FRANCHISE
Many business owners augment the CSBF franchise loans with HELOC'S (Home equity lines of credit). These HELOCs tend to backstop the funds put into the venture via the bank and government loan. Unfortunately, many prospective Canadian franchisees have to tap into RRSP savings, which has some tax implications for their advisor.
Franchise financing in the current 2020 environment, pandemic issues included! Requires a solid owner equity investment. In some cases, this amount approximates 50 %. That has the bank loaning you $100,000.00 under the CSBF program, and you are committing $100,000.00.
This example, of course, assumes you need $200,000.00 for your venture in this instance. Opening balance sheets prepared by the owner or their advisor and consultant should reflect positive working capital ratios that meet the government program requirements.
WHAT DOES THE CANADA SMALL BUSINESS PROGRAM FINANCE
The CSBF loan program finances only certain asset classes, and owners should investigate or rely on their advisor or consultant to be financed. Typically soft costs such as franchise fees are covered by the owner directly and not financed. Franchise financing is more challenging today, given that many lenders have either temporarily (or permanently!) exited the marketplace.
OTHER REQUIREMENTS FOR LOAN APPROVAL
While the interest rate is desirable and competitive, a good owner credit score and personal credit history are required given its start-up nature. Interest rates will vary greatly with the type of financing you require, given that it's a new business and, in some cases, an unknown new franchise in Canada. Many franchisors will help qualify prospective franchisees with their own prerequisite requirements.
The franchisee should investigate all options thoroughly and understand what financing options are available and which options best suit their needs and personal financial situations.
The franchisor's franchise fee is generally not financeable and paid separately by the franchisee as a part of your franchise agreement.
CONCLUSION - FRANCHISEE FINANCING PROGRAMS
For proper due diligence and advice, talk to an experienced advisor in the franchise financing industry, such as 7 Park Avenue Financial, who can help you own a franchise and secure your franchise business model of choice.
