How to Finance a Franchise Resale?
So you’ve found a resale franchise, gone through negotiations, settled on a price, and drafted the sale and purchase agreement. Now you need to secure financing somehow, from somewhere. But where do you look?
There is no shortage of financing options out there for small businesses in Canada, so this step of buying your resale franchises shouldn’t be too difficult. Here are the options to consider.
If you can afford it you could always just buy the resale franchise with your own funds. You could access your own savings and investments to come up with some, if not all, of the agreed upon price. Buying a resale franchise with cash results in a debt-free small business, but you might want to save your capital for leasehold improvements instead.
Direct Franchisor Financing
If you can’t pay up front, your first stop on the quest of financing your resale franchise could be the franchisor. Some franchisors offer their own in-house financing options. If they do it will be in the disclosure agreement. Be sure to do your due diligence and see if their terms and rates are fair.
Banks and Credit Unions
These conventional methods of financing are always a viable option. Considering there are so many banks and credit unions out there, there are a lot of different ones to choose from and they are fairly competitive. Lenders ask for collateral and a solid credit history, and repayment terms are usually five to ten years.
Government Small Business Loan
The Canada Small Business Financing program has been active since 1961 and it has funded thousands of small businesses. The program allows you to finance 90 per cent of your purchase, up to a total of $500,000. $350,000 of that can be spent on equipment and leasehold improvements. The remaining 10 per cent of your resale franchise cost must come out of your own pocket, and this low equity requirement is one of the reasons why the program has been so successful.
Most banks, credit unions, and leasing companies can help you in registering for a CSBF loan. A few restrictions apply however.
- Your business must make less than $5 million gross income in the first year
- Your business must be operating in Canada
- Improvements and assets you buy with the loan must be used in the business
Online Loan Portals
This is the newest method of financing available. These websites intend to match borrowers with potential lenders by looking at your online application and sharing it with lenders who could be appropriate. Ask your franchisor if they are on board with any of these networks, and check the IFA supplier forum for links to trusted sites. Putting yourself up on these portals allows your application to be seen by many institutions, thereby increasing the number of possible lenders who could offer financing.