YOU ARE LOOKING FOR A LOAN FOR A FRANCHISE OPPORTUNITY!
Franchise Financing - How To Get A Business Loan To Buy A Franchise
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Financing & Cash flow are the biggest issues facing business today
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Oakville, Ontario
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Financing a franchise in Canada -Just when the entrepreneur comes out in you to be a franchisee in Canada a new challenge arises - how to get a small business loan for a franchise opportunity. At that point, you have most likely made the decision that you are suited to be part of the franchise industry and have picked your industry and vertical - whether that is hospitality, a service industry, retail, etc.
YOUR FINANCING PLAN IS YOUR BUDGET - DEBT AND EQUITY
That financing challenge must now fit into a budget that comprises your own equity in the transaction as well as how much money you can raise to complement the rest of the transaction. Certain things you can do properly will ultimately affect the outcome of your transaction and success in franchise loans.
THE FINAL BUSINESS CAPITAL STRUCTURE MUST MAKE SENSE
The whole issue of down payment or owner equity is top of mind for most franchisees. You want to ensure you have the optimal amount of debt and equity, you don’t want to over-borrow, and we’re also encouraging you, to the extent you can, to separate your personal finances from your newly incorporated business.
ENSURE YOU HAVE THE RIGHT COMBINATION OF DOWN PAYMENT AND BORROWED FUNDS
A while back we spoke with a franchisee who advised us that he had ' paid cash ' for his entire franchise. Unfortunately, sales and profit objectives weren’t being met and his entire personal life vis a vis savings, credit history, etc was at risk. So that ' pride of ownership' issue somewhat backfired on our client. Don't let that happen to you. Franchise loans and other financings you need for your venture translate, 99% of the time, into fixed monthly payments that must be met to the lender, as well as royalties under the franchise agreement for the franchisor.
Ultimately you want your business plan and cash flow to reflect, and deliver on! The fact that your franchise will be able to meet its own financial obligations, as well as allow you to draw a salary and or bonus that meets your lifestyle needs. It is important to understand the actual cash flow of the business that will allow you to meet your needs as well as commitments to suppliers/lenders.
CHARACHTER / EXPERIENCE/ PERSONAL FUNDS / CREDIT HISTORY
Knowing how the bank or a franchise lender views your application gets you a great start on the road to a successful finance plan. You'll be judged on your overall character, the amount of money you have to put into the business, your business and or industry experience, and your overall past personal credit history and net worth/credit score in your credit report.
You can also purchase and finance an existing franchise under the terms and conditions of the franchisor on resale opportunities. A transfer fee of some sort might be applicable of course. Many franchisors require an appropriate level of due diligence and training within their franchise model.
The manner in which you ' sell' your financier on your franchise financing needs is reflected in your business plan. The ability to sell your concept and background and experience, as well as business potential has to be reflected in your business plan and cash flow projections. Ensure you plan for day to day working capital needs after your acquisition.
The issue of franchises being riskier or less risky is always a discussion point we have with both prospective franchisees as well as the finance community in general. Yes, you are of course buying into a proven business model and brand, but at the end of the day, you are in many respects a new business start-up.
GOVERNMENT OF CANADA FINANCING PROGRAM CAN MAKE YOUR FRANCHISE HAPPEN!
That’s why many successful franchisees utilize the government BIL/CSBF business loan to finance their business. It offers premium rates, flexible terms, a lower personal guarantee component, and can even be repaid without penalty. Ensure your business plan has the appropriate and conservative financial projections and highlights your business experience. Angel investors/grants etc are not the way to typically finance a franchise, which is done more in the traditional lending area. Payment terms and interest rates are both excellent and flexible. The rate is only several points past the prime rate under the government loan program conditions.
In some cases, some franchise systems might have real estate potentially involved and that is usually financed separately.
CONCLUSION
Our final pearls of wisdom today around franchise opportunities? What do you need to know about franchising? Just the basics... spend time on the amount of funds you need, allow for reasonable timeframes to complete financing, plan for a realistic payback, and seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in complementing the financing you need to make your venture successful.
All franchise owners think they have a good idea, but for additional help check out the Canadian franchise association to get additional help and advice, as well as carefully reviewing the franchise disclosure document. Bottom line? Do your homework and ensure you have given the opportunity the appropriate due diligence.
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Stan Prokop
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