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Franchise Loan – A Franchise Financing in Canada Primer

Guest post by: Stan Prokop

Article Overview: Information on how Canadian entrepreneurs can get a franchise loan . What are the Options for Canadian franchise financing .

Franchise Loan – A Franchise Financing in Canada Primer

A franchise investment you are considering in Canada is clearly one of the large business and personal decisions you will make . Is Franchise Finance available in Canada, and if it is, how does it work?

Clients are always asking us how franchise financing works . Typically, and hopefully !, they have made a substantial time investment in the selection of a franchise . This more often than not seems to be in the restaurant business, but in reality there are hundreds of other franchise opportunities available to the Canadian entrepreneur. Many prospective franchisees we meet have come from the corporate or 'job' world, and are looking to be independent business people in command of their own life and financial destiny.

There are two schools of thought in Canada around actual financing your franchise investment -

School of thought # 1 - Financing the business will be difficult

School of thought # 2 - Financing the business will be easy

I think the reader knows the answer, which is simply that there is a little truth in both statements. The reality is that there are only 5 methods of financing a franchise in Canada and the successful completion of a transaction is always one or a combination of those types of financing

What are the 5 types of financing for your new business - We will keep it simple. They are:

1. Government financing under a special loan program that suits most franchises

2. A working capital term loan

3. A vendor takes back from an existing franchisee you are buying the business from, or the franchisor

4. Equipment financing

5. Your own personal equity investment into the business (It can't all be other people's money)

There is a common perception by our clients that banks and lending institutions are reluctant to finance a franchise. That is not the case, but does involve showing that you are properly prepared. More often than not you should be spending time on the financial planning aspects of your business. This can be done by utilizing simple cash flow templates.

Sit down and estimate how much monthly revenue you will generate. Now, let's look at expenses. We like to start off with an estimate of what you want to draw out of the business every month as a salary. Then simply go down a list of expenses that seem to be realistic in the new business. Typically those items include basic things like your costs of sales or inventory, advertising, wages to any employees, accounting fee, phone, utilities, etc,etc,etc,

At the end of that quite simple exercise you will be left with either a profit of a loss. We would suggest that if you are left with a significant loss that you reconsider the investment. However, if you are within the striking range of both paying yourself and creating a small profit then you probably have a reasonable franchise risk investment.

Other factors to consider are the amount of your own investment in the franchise. It does not make sense to over invest in the business, but there is a fine line between what you put in and what will then create somewhat of a comfort buffer in case sales don't materialize as quickly as you want them to. Remember Murphy's Law, which is 'what can go wrong will'.

In summary, how to finance your franchise is often as critical as picking the right one. Plan carefully, assess which of the 5 options, on their own or together might work for your franchise acquisition, and sit down and carefully work out a realistic profit and cash plan. If necessary work with a trusted, credible and experienced advisor who can assist you in this unique area of Canadian business financing.

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Article Tags: franchise financing in Canada, franchise loan



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
canada resources - I used to have a connection to a franchise consultant in Canada at "Franchise Officer" in Toronto. I wish I could remember his name ( but I can check my files at the office tomorrow). Anyway, he had a lot of connections to banks in Canada. He may know of them and may be able to offer some feedback. If you are looking for a business loan, Canada has similar business loan programs to that of the USA's Small Business Administration (SBA). I think its SLBS in Cananda, and I probably have the list of it's lenders in my office also. Do you think either can be helpful? If so, I can get back to you with this information tomorrow. Let me know!


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