Financing Options For A Franchise
Deciding to go into business is a big one. For those who have opted to buy into a franchise, they may need assistance with financing. In Canada, there are some great options for this, and they each should be explored carefully before making the final decision as to which one to choose.
It is usually first on the list when an individual is looking for financing for a franchise. It is because most people are familiar with these types of financial institutions. What they may not be familiar with is the commercial side of banking. It is the department that looks after businesses and is quite a bit different from personal banking. It means when you are applying for a franchise loan that you may be dealing with new personnel at the bank with who you are not familiar. Banks will often lend money to franchises.
Often the government has different incentives in place to encourage new business owners. These can change at any time. Some of the resources that may be available are:
Innovation, Science, and Economic Development (ISED)
They can provide a good deal of information in regards to going into business. They may be able to suggest some financing options for franchises. They may be able to provide funds through some of their additional programs like the Canadian Small Business Financing Program. There may be restrictions on the use of the funds when it comes to franchises like the money cannot be used for the fees. However, it can be used for other essential purposes like the purchase of equipment, or qualifying fees.
Government Grants and Funding
Relying on the government resources that pertain to new businesses can also lead directly to different types of funding that may be in place. A useful resource is the Canada Business website.
Many franchisors realize that potential franchisees may not have access to the funds they need to buy into the franchise. To make this easier, they may offer financing options. Some franchisors will make agreements with specific lending institutions to back their applicants financially.
Some individuals are in a situation where they may be able to borrow from friends and family. Some financial options may be able to be negotiated with this type of lending.
There could be the traditional loan where it is agreed upon that the money will be paid back within a specific period at a set amount of interest.
If it is a family member, then the terms of repayment may be more flexible. The party loaning the money may be willing to allow the franchise to become solid financially before reimbursement is made. Also, any interest fees may be omitted.
There may be someone in the family or a friend that would want to become a partner in the franchise, which would then mean only having to come up with half of the required money.
Another option may be to offer a private lender a percentage of the profits for a specific period. This could be instead of paying back the principal amount or instead of any specified interest.
These are individuals who want to invest their money in the success of others. A franchisee is a good example. They naturally want something in return, which is usually some equity.
Setting Up For Success
Researching the potential resources for financing for a franchise business is just the first step. The next and critical step is being prepared to convince a potential lender that they will be making a good investment. It doesn’t matter who the lender is. It is a step that cannot be overlooked.
The Proper Documents
A potential lender is going to want to see some documentation that supports the viability of this type of venture.
A Resume: They are going to be keenly interested in the credentials of the person buying into the franchise. The best way for them to determine this is by the individual’s resume. This will give them some idea as to the type of experience they have. For example, if an individual is going to buy into an aesthetics franchise, they may have many years of experience working in this field. If so, then it builds the confidence in the lender, that the applicant is qualified.
Proof Of Residence: The lender is going to want a physical address. They may also want to know if the applicant owns or rents their residence and how long they have lived there.
Financial Data: The potential lender will do a credit check. They will ask questions about the applicant’s financial status, such as whether they have any other sources of income.
Tax Returns: These are often required as they are the most reliable proof of an individual’s financial status. It is also an indicator that the applicant is not in arrears with their tax filings.
Business Plan: This can be a fairly lengthy document and one that should be adequately prepared. It has to give the potential lender an obvious picture of the franchise as it is now and what the projections are for the business throughout future increments.
What Is Looked At?
Knowing what the criteria are that lenders use when assessing a loan can be helping in making sure the applicant is prepared. These are what are commonly called the 5 C’s. These are:
- Credit History
Aside from the documentation that will be necessary, there is a physical presence that will also be important. Applicants looking for franchise funding have to present themselves as serious business people. It starts right from their appearance to their demeanour. They need to be knowledgeable about the proposed franchise and be prepared to answer questions concerning it.
Applying for financing with confidence will allow the applicant to present themselves in a much stronger way. Most people find it intimidating to ask for money, but being fully prepared is a real confidence builder.