Franchise Financing In Canada Today 7 Park Avenue Financial

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Franchise financing in Canada has to work for you as the franchisee as well as your franchisor and of course your lender(s).  How do you access franchise finance after you have made the critical decision to purchase a new or existing franchise – in many cases, you may be fighting timelines and need to ensure that you have access to all the proper information about financing your business, and, more importantly, ensuring you have put together the best franchise financing package. Let’s examine some of those issues.

Financing is available for pretty well every type of franchise in Canada, and most people are very surprised to hear that franchising as a whole in Canada accounts for close to half of all our retail sales – that’s a staggering figure, so franchisors must be doing something right!

We are all probably keenly aware that many franchisors in Canada are in fact branch organizations of U.S. based systems. That is ok as long as your franchisor has an acceptable and successful franchise model. Financing for your Canadian purchase should not be affected by a U.S. ownership of your franchise system.

There are a couple of major questions that, if clarified early on in the process, will allow you to finance your new business in a successful manner. One of those key questions is whether your franchisor has a program in place that they either self-fund or perhaps work in partnership with a Canadian financier such a bank. However, in our experience we caution clients not to rely on or think they will receive a huge amount of assistance, particularly financial, in setting up their business.  There is one clear reason for that, the franchisor is in the business of selling franchises and using your funds to build the next one – that’s how it works, and there is of course nothing wrong with that.

What the franchisor can, in fact, do though is to give you guidelines around how their franchisees have been financed in the past, and provide you with sample breakdowns of financing needs. Financing needs for a franchise come in a couple of concise categories – they include the franchise financing fee itself,  equipment and leaseholds that may be required to open the business, and of course ongoing working capital.

Ongoing working capital is a key point - imagine the disappointment or stress of financing a franchise for purchase and then slowly discovering you don’t have enough working capital to fund receivables, inventory, growth, equipment and expansion needs, etc.

Clients are always asking if financing a franchise in Canada is different from financing any other business. The answer won’t be one of your favourites – the answer is yes and no!  Any business, franchise or not, requires a finance plan to purchase the business, a business plan to map out costs and growth, and ongoing working capital financing. In that manner franchise finance is similar to starting any business. Where it differs is that there are a limited number of ways in which a franchise is financed in Canada. It may surprise most entrepreneurs that banks and other lending institutions and firms view the industry fairly positively – we think that’s because there is strength in a proven business model, resaleability, and the branding that comes with your purchase.

Financing your business purchase has to be a carefully followed roadmap. In Canada the majority of franchises are financed by a special program called the CSBF program, which in fact is a program supported by the government and administered by the banks. As an owner you have to put some of your own equity into the business. The key challenge is what's the right balance for that amount – you don’t want to borrow too much, and conversely you may or may not have a huge amount of equity to put into your purchase of a new or existing franchise. We say existing franchise because it is perfectly acceptable to purchase a business, and finance it, from an existing franchisee. In some cases the financing is actually easier because there are financial statements and a financial history to the business already, as well as possible existing assets to the business.

In order to finance your franchise you require a breakdown of the different asset categories – as well as a business plan that shows cash flows and projected profits. As a business owner you should have some experience or skills related to your purchase, and we already have mentioned the fact that you must put a ‘reasonable' down-payment into the business from your own funds. Business owners with spotty personal credit histories have a larger challenge in getting financed, as there is an emphasis on how you have run your affairs in the past.

In summary, focus on getting the right franchise that suits your skills and risk tolerance. Understand your finance plan as it relates to the purchase and ongoing needs of your business. Speak to an experienced, credible, and trusted franchise financing expert to ensure you can successfully complete your acquisition and commence your entrepreneurship journey! 

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