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How to Protect your franchise investment with smart financing options when you buy a franchise

Guest post by: Stan Prokop

Article Overview: Information how Canadian business peope who wish to buy a franchise can finance their franchise investment . How the franchise cost of your business is financed in Canada and how to do it properly .

How to Protect your franchise investment with smart financing options when you buy a franchise

It was, or will be an easy simple decision right? We're talking about the minor issue of your decision to purchase a franchise.

We're just kidding of course, because we know the franchise investment you make when you buy a franchise is one of the larger decisions you'll make in your life. And we clearly recognize the franchise cost of that investment is never a small one. So we are thinking you want to do it right?!

You can protect your franchise purchase by financing it properly. You want to be in a position to satisfy yourself, and your lender that you have the right amount of debt (I.E. loans, etc) and equity into your transaction.

It seems that it's always about the money, and that was probably one of the concerns you had when you made the decision to purchase a business via the franchise industry. You recognized it was a potentially great way to build wealth and equity, but wondered where start up capital would come from.

The reality is that start up capital for your franchise investment comes from two sources, yourself, and one or two other lenders who specialize in franchise financing. Actually a large majority of franchises in Canada are financed under a government program that is technically called the BIL/CSBF program. Bar none it is the best financing deal in Canada for any new business, and franchisees have flocked to it for years. More about that program and how you can achieve success via it later...

We can't over emphasize that one of the key factors for franchise approval, under our above noted program, and others is simply that you require a decent personal credit history. Without getting to technical we can simply say that means that you have historically paid your bills, not been bankrupt, and aren't over borrowing in your personal life. Enough said about that. When we meet with clients looking for franchise financing this is one of the first areas that we (delicately!) explore.

But clients want to know why this is such a key factor, and its simply because the reality is that a franchise is , no matter how you look at it, a small business start up, and lenders look at how you run your personal life as a mirror as to how you will run your business .

Planning - that's the keys secret in financing a franchise investment you are going to make and ensuring the franchise cost of that decision is properly financed. You do this in a variety of ways, one of which is documenting your purchase and plans via a properly prepared business plan. This document should highlight yourself, your business experience, and show the financial fundamentals of your business, i.e. Cash flow, ability to repay your loans, what the opening balance sheet will look like, etc.

We clearly realize that not all our clients have the financials skills, background and ability to prepare such a document, let alone present it. That's why it's a good reason to consult a Canadian business financing advisor or expert who is credible, experienced and trustworthy and an expert in franchise finance in Canada.

We also remind you that step one when you buy a franchise is financing it - step 2 is making sure that you have a plan around how you will grow your business while having enough working capital to run it.

In Canada franchise cost is financed via the Government BIL program we noted - The borrowing limit is 350k, and we have found that this financing can be supplemented with equipment and lease financing for certain assets of the business . Those two strategies, coupled with your own investment of funds will get you to the goal line.

Speak to that ' in the know' advisor we talked about and you should not have any worries in your ability to finance and buy a franchise.

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Article Tags: buy a franchise, franchise cost, franchise investment



Related Forum Posts
Loan prequalification & find the right franchise invest. - You need to identify how much you are eligible to borrow and that will help determine the right franchise and investment size you should be looking into. With a 100K, you may qualify up to 200K depending upon what your net worth and credit score are. You can use 50K of your money to invest (covering your inital franchise fee & loan down payment) and 50K as an asset (placed in an interest earning CD) for collateral at the bank where your loan will be (so the lender can lien the CD). Our company can Under-collateralize a loan and count/credit your franchise fee (and other out of pocket expenses) toward your loan down payment. We also have free franchise consulting resources available to help you find the right franchise investment (that you qualify for). Also, once you are pre-qualified by us (a free service), you will receive a free letter stating your loan eligibility and that often helps with a franchisor (where their requirements may be different) . Once a franchisor knows you are a good candidate for financing and you have a letter stating that, they tend to overlook their own requirements. Contact us, we may be able to help you.
Re: 40 cents per dollar is spent in a franchised business - Hey Ringo, You quoted this information: "The average initial franchise investment is $250,000" Here is your statement/question: "While I understand that you are paying for someone else's success in development, marketing and business model, with such a big upfront investment, why not make something of your own?" The part I would like to comment on is where you say "with such a big upfront investment". On an average initial franchise investment of $250k, the buyer is only fronting 20-30% of that. So their initial cash investment is actually only $50k to $75k. Although that is nothing to sneeze at, if you have a good system that you are buying into and you have the drive and ability to be a good business owner, statistically speaking you stand a higher chance of success with a proven franchise than an independent business. Of course we have all heard the numbers that are thrown around by various folks about what the increased success rates are, I don't know what they are exactly, only what I have been told by "others". I always always recommend performing the proper due diligence when reviewing franchises. From what I understand the increased expenses of owning a franchise are more than offset by the increased revenues & increased profit dollars at the end of the day. There might be a few businesses though that are not conducive to franchising, for example a web based business is hard to franchise because of competition and low cost of entry. I review independent businesses and franchises every day. The thing that stands out more often than not is that the independent businesses are not doing as well as the franchises overall. Remember though, I might be a bit biased because I am a franchise consultant, so for full disclosure, I make money when people buy franchises. I think with the proper due diligence most people will make the right decision. Reducing risk, increased profits and financing options continue to make franchises popular to the average Joe. .
Re: Fed rate cuts . . . - Prime may be down but the Lender's tightened up, so the rate going down really doesn't help the avarage Joe or the fair credit borrower. Seems that pro-franchise Lenders all over the country all raised their standards. Where I used to be able to get someone franchise financing with a credit score of 650 and minimum collateral (30- 40%) with little management experience or no direct industry experience; the Lender's now want credit of 670+ and 50 - 70% in collateral on a minimal level (depending upon the lender and the franchise) and they are all requiring stronger & related experience (industry experience preferred). New franchises to the franchising industry are very hard to get financing for, unless you are a really strong borrower with strong related experience. If you are opening a restaurant franchise, the lenders want to see you have restaurant and management experience. Lenders also want to see a long track record with a franchise and they want to see 75+ units up and running successfully before they put down their guard. These are truely tough lending times and i don't really think the lower rate helps the avarage person.
Re: Which franchise would you buy? - I know this topic is nearly 10 months old, but this is a question you can ask at anytime. It might be interesting to ask, now, once again, what franchise (or in what industry) would you buy at this time? I was recently on a forum and came by the discussion on whether or not a franchise investment in the Advertising industry might be wise at this time? Something along the lines of a sign business, multi-media opportunity, etc. Won't businesses be needing/using these types of franchise businesses more than ever to try and gain customers/clients?
Hello I am a franchise expert - Hello, I recruit franchise owners for successful franchise concepts based in the USA. Many of my franchises are looking to expand north to Canada in all major centers. I enjoy networking and answering questions about franchising. If anyone is interested in the franchise world or looking to buy a franchise then contact me. I have a wealth of information and like to help. Thanks for your time. Michael Somer


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