Just a thought here, but why not do it right the first time? We’re talking about how to finance a franchise business and obtain the right financing loan for your new life as a franchisee.
Let’s share some tips on how things are done, with a focus on ‘ getting it right the first time ‘. We’re also hoping that by this time you have a strong sense of what franchise you are looking to purchase and that you are comfortable you can run the business from a financial and operational perspective.
So where does one begin? It’s often not where you might think. While there are hundreds of quality franchisors out there it’s a bit of mis – information if you think that the franchisors responsibility or talent will help you actually get the business financing you need to start the franchise. Of course they want you to get approved, and often can assist in some manner, but at the end of the day the responsibility to get this financing completed lies with yourself!
Banks are interested in financing your franchise, but in somewhat of a specialized manner which we’ll address shortly.
Job one simply is determining the amount of capital you need. Thing you need to consider also is the breakdown of that capital. Why? Simply because different types of financing are more suited and applicable to different types of assets.
Items you typically need to consider are the franchise fee itself, i.e. your gateway to the business! As well as equipment, leaseholds and working capital. Those key categories are a pretty good way of categorizing and summarizing your financing needs. Naturally your premises lease is a separate issue and operating cost.
We often point to clients who ask us how to finance a franchise business that it’s as important to consider the ongoing financing needs of the business as it is to focus on getting the original financing in place. You want to be able to get a sense of what your overall financial plan looks like when it comes to sales, costs, and profits – its those profits of course that repay the loans you will enter into !
We can’t remember a time when a client has not asked us the proverbial question – ‘ so how much do I have to put in ‘˜… referrring of course to their owner equity of beginning capital in the business. We’re never one to sounds like our good lawyer friends, but the reality is that it depends. (That’s not always the answer our clients were looking for). However, in broad terms we can say that you can be expected to put up anywhere from 10- 40% based on the nature of your business and the amount of capital you are going to need.
Franchises in Canada are financed by only a handful of means. Let’s recap them for you, and then you can hopefully determine which method is best.
We certainly don’t recommend paying all cash or collapsing savings to pay for 100% of your franchise. A mixture of debt and equity is always the better way to go. Naturally you don’t want too much debt, and at the same time you want to obtain some proper… what the financial folks call ‘ leverage ‘ to ensure you get a good long term return on the money you have put in and borrowed.
Franchises in Canada a financing loan that will complete your franchise tends to come from 3 sources – the BIL/CSBF loan that is sponsored by Industry Canada, as well as financing from specialized independent finance firms that focus solely on franchise finance. These firms typically only deal with very established franchisors, so they are not going to be able to suit the majority of Canadian potential franchisees. Specialized finance firms such as lease companies also can provide a key financing component to your finance success.
For the right match of debt financing and the best finance solution for your particular needs consider spending some time with an experienced, credible and trusted Canadian business financing advisor who can assist you in your franchise business goals.