We can pretty safely bet that after you have made a decision to purchase a franchise in Canada that franchise financing becomes, at least temporarily, one of the most important priorities in your life. Let’s examine some tips, info, and strategies allowing you to work through, successfully, the finance company and the various lenders and loans available to yourself.
In speaking to many clients it’s quite clear that the type and style of franchise they wish to purchase is often tied to their perception of their ability to close financing on that purchase. And when we look through the business news these days it seems that all types of businesses, from start up to large corporations have formidable financing challenges.
The reality is though, that if you have priced your franchise purchase properly relative to your own personal situation, which includes your credit history… that you should be in a position to acquire the financing you need.
So what are the ingredients to that success? Some of the key basics are a ‘ proper’ proposal and your ability to commit some capital to the business. Clients are always concerned about how much owner equity they will have to put into the business – In Canada our experience is that typically is in the 10 – 40% range, with 10%being the absolute minimum.
Franchise financing is sold on the basis of your business plan. That document does not have to be as formal as you think, but it should include the essence of what you are trying to achieve. Those basics include info about yourself, your work and career history, your personal financial situation. The document should then cover off details on your franchisor, the business model they operate under, and finally, and perhaps most importantly a credible financial projection.
We’re often asked how much detail goes into the financial projection for the franchise financing company or bank. The simple answer to that is that you should be demonstrating in a clear fashion how the loan or loans will be repaid.
We encourage all clients, via vigorous discussion to ensure they are in a position to defend their sales and cash flow projections – and, as importantly, are prepared to answer any questions the lender might have. A clear presenation,backed up by your confidence and experience are key to franchise financing loans that are successful.
Contrary to the beliefs of many franchisees in Canada your franchisor typically doesn’t play a large part in the actual financing of your franchise. In certain cases they possibly might have some sort of program in place with a finance partner, but that somewhat rare in the mainstream of franchises that sell in the 100-350k range.
So how are these financed then? Good question! One or two specialty franchise finance firms provide acquisition loans in the industry. These typically are for the largest brand names and when ticket size of the purchase is quite significant.
The reality is that the government, via the Canadian BIL / CSBF program has evolved into one of the largest financier of this business segment in Canada. The program has been adopted by hundreds, probably thousands of business owners to facilitate franchise financing loans. And for good reason, low financing rates, great terms, structures, and maximum flexibility on repayment.
In many cases financing of your franchise is complemented by specialty equipment financing for certain assets, as well as working capital loans when that is prudent and feasible. We always remind clients think in terms of acquiring the franchise, and then focusing on ensuring it will be financed properly on an ongoing basis. Running out of money right out of the gate is not recommended! That’s where your business plan and financial projections must be realistic.
Don’t let the financing of your franchise overwhelm you – speak to a trusted, credible and experienced Canadian business financing advisor on a finance strategy that makes sense for your particular situation.