Examining your franchise financing situation
You must not launch a franchise business without adequate financing.
In addition to the money you’ll need to buy into the franchise, you’ll need start-up capital to get the business running, plus you’ll need money to support yourself and your family until the business begins to generate a profit.
Examining Your Current Financial Situation
You won’t know whether you have enough money until you start examining your finances. You should determine what your resources are, where you can get some help, and whether you’re able to make a franchise investment.
After you have made a self-evaluation, the first thing is to realize that you likely have some limits in the type of franchise you can afford to invest in because of your available investment capital. Not all franchises are successful and even when they are they often take longer and require more capital to reach that point of success than anticipated. Keep a reserve for the unforeseen or unexpected.
Using the investment parameters you have established, the second thing you should do is begin your investigation of which franchise is right for you. Always stay within your parameters.
Seek out franchise opportunities that support your efforts by assisting you in obtaining loans and other forms of financing such as leasing.
Sufficient cash and net worth
There are always people who are prepared to invest every cent they own into the down payment of a franchised business, only to find themselves disqualified by lack of net worth. Most banking institutions and well-developed franchisors assume every new business venture could lose money and require extra cash after opening. However, neither is likely to provide that extra cash through franchise financing, so you’ll be expected to fund the shortfall until profitability is regained. For this reason, most franchisors require you to be able to draw on additional funds after the initial equity investment is given. These extra funds can come from equity in real estate or other investments.
Net worth guideline
Your net worth (all assets less all debts) should be equal to the cost of the business. If your net worth is only half the cost of the business, consider a less costly franchise or bring in equity partners to help with the funds.
Sources of financing
Some franchisors offer franchise financing in-house. Others work with lending institutions. In any case, you’ll need to determine in advance, your net worth; your credit potential (based on your credit rating and credit score), and the sources of financing that may be available to you.
Some potential franchise financing sources for first-time franchisees include the following:
Personal savings and investments
Borrowing from friends and family members
Taking out a small business loan from a local bank or credit union
Obtaining a second mortgage on your home
Working with outside investors or investment capital firms
Obtaining a loan from the U.S. Small Business Administration (SBA)
Obtaining a loan from Canada Small Business Financing (CSBF)
You must come up with the money to be in business!
The statistical truth is that the single most common reason new franchisees (and for that matter, all other types of new businesses) fail is that they didn’t have enough money going into the investment.
A responsible franchisor will not take on a new franchisee that does not have the appropriate financial resources to get the business off the ground and make it profitable
Lining Up Your Franchise Financing
Analyzing whether you’re creditworthy
Take a look at your current finances and analyze whether you’re creditworthy before you start applying for any type of financing or small business loan. Evaluate your own credit history by obtaining current copies of your credit report and credit score from credit reporting agencies, such as Experian: www.experian.com, Equifax: www.equifax.com, and Trans Union www.transunion.com.
If you discover there is a lot of negative, but accurate, information on your credit report(s), or you discover inaccurate information, you’ll want to take steps to improve this information or have it removed before applying for any type of loan or financing.
Ideally, you want to present to potential lenders a credit report that contains little or no negative information, especially no current negative information.
For more relevant information, be sure to see:
Franchise Business Plan
Franchise Financing Overall Costs
Buying a Franchise
Return from Franchise Financing to Best Franchises