How to Finance a Franchise
You’ve done your due diligence research and have narrowed it down one franchise that you want to buy. Now you need to come up with the investment money to get started. Franchises can cost anywhere from the tens of thousands of dollars to several hundred thousand dollars in total, and you may not have that kind of cash on hand. If you don’t get through this stage, your franchise dream will never become reality.
Net Worth, Credit Rating, and Business Plan
Calculating your net worth should be the first thing you do. To do this, add up all your assets and liabilities, and then subtract the total liabilities from your total assets. The result is your net worth. Assets include cash savings, real estate holdings, vehicles, and investments. Liabilities are your debts, mortgages, and loans. You should also look at your credit rating, as you will likely need to borrow money from somewhere. Credit rating depends on various factors including income, track record, and employment stability. Any lender that you go to will look at this to decide if they should give you a loan.
It is also advisable to create a business plan. This is a lengthy document with many sections and can take a long time to fill out, so it would be wise to seek guidance in this. Having a comprehensive business plan can show lender you are prepared and serious about your investment.
Many Different Lending Options
Once those preliminary steps are taken care of, it’s time to look into lending institutions. Your first stop might be the banks to apply for a loan. All major banks offer business loans, but there are other options out there.
Consider looking into the Canada Small Business Financing program. It’s been around since 1961 and many franchisees aren’t aware of it. It’s a loan and loss sharing program between the government and other lenders that can provide up to $350,000 for leasehold improvements, and up to $500,000 for property acquisition. These loans can finance up to 90 per cent of all the franchise cost, but can’t be used for certain things like inventory, franchise fee, ad fund fee, research and development, or legal fees, to name a few. In 2011, 16 per cent of the loans distributed through this program were given to franchisees, so it could be a great opportunity if you don’t want to go through the banks.
Other less favourable options include taking out a home equity line of credit, or a second mortgage. This does come with some risk since it involves putting your house on the line, but you can pull it off if you to stick to the repayment schedule. The franchise you are going with my also have their own financing program available, so you should definitely look into that as another possible option. In fact, it could even be your first choice if the terms are ideal or if you can negotiate something better.
Be Well Advised
You may also want to enlist the help of an accountant or financial adviser to ensure your decision is well informed. You will have to provide a certain amount of liquid capital upfront with any franchise, but don’t invest more than 75 per cent of your total cash reserve. Take your time, and don’t rush. There are many options, so be sure to consider them all and make your investment a smart one.To contact Chris, follow his Twitter Handle @RiddellCreative