While business ownership always carries a certain amount of risk, buying a franchise can offer you a more secure path to becoming a business owner. After all, when you buy a reputable franchise, you acquire a proven concept, a trusted brand, and valuable advice from existing franchisees. However, as with all businesses, franchise ownership requires a large investment upfront. Since paying in cash isn’t typically an option, most potential buyers acquire financing in order to buy a franchise.
7 Tips to Financing a Franchise
In Canada, there are many options when it comes to financing a franchise, and with strategic planning and research, you can be on your way to franchise ownership. If you are looking into how to finance a franchise, consider the following tips.
#1 – Understand the Total Cost of Your Franchise Purchase
Coming up with the total cost of buying a franchise is a comprehensive process. Don’t be shortsighted as you begin crunching numbers. The loan you receive should not only cover the base price of purchasing the franchise, but it needs to include enough working capital. This can determine the success or failure of a business.
“Working capital is important because it is necessary for businesses to remain solvent. In theory, a business could become bankrupt even if it is profitable. After all, a business cannot rely on paper profits to pay its bills—those bills need to be paid in cash readily in hand.” (Investopedia)
Another area to consider when thinking about the cost of your franchise purchase is the various loan conditions. In some cases, it might be prudent to look beyond the interest rate if the loan allows you to postpone the principal payment. This gives you more time to get your business up and running.
#2 – Shop Around for Your Loan
Making a smart choice from the start will reap benefits down the road, and vice versa. Don’t take the first loan that becomes available unless you’re certain it is going to meet your needs better than any other option. Speaking with multiple financial institutions can help you achieve more favourable loan terms, diversify your financing sources, and reduce your risk overall.
#3 – Be Prepared When Meeting with Potential Lenders
If it wasn’t already clear, doing your research and being prepared is essential to a smooth process when buying a franchise. If you plan to meet with any potential lenders, make sure you gather the following documents in advance:
- A resume that includes educational and work history
- Proof of residence
- Financial statements from at least the last year (personal and business)
- Tax returns from the previous three years
- Credit report
- Business plan
Going above and beyond to prepare these documents before speaking with a potential lender will not only speed up the process, but it helps the lender view you as a responsible and low-risk investment.
#4 – Understand the Terms of Your Franchise Contract
Make sure you understand the ins and outs of the contract with the franchisor so you’re not blindsided later down the road. Some questions to ask include:
- Who owns the lease on the franchise location?
- What are the repayment requirements?
- Are there any royalty or revenue sharing obligations?
- Are there any sales requirements?
#5 – Accurately Assess Your Capacity to Invest in the Franchise Business
Again, it is essential that you think beyond the short-term when considering the total costs of buying a franchise. Even if you have the initial investment money with some working capital, you might also need to put your own money into the business at the beginning to compensate for sales that are lower than projected. Be honest with your financial status before making the commitment to acquire financing to buy a franchise.
#6 – Make Sure Your Paperwork is Ready
You should prepare the following information for your potential lender:
- Personal finance statement, which should include your net worth
- A business plan (read this blog to learn more about how to write a business plan)
- Franchise agreement draft
Put this paperwork together before trying to secure a loan to make the process more efficient.
#7 – Choose Your Financing Source
There are several options for financing your franchise in Canada.
- Bank loans – Banks provide various types of business loans. While they’re not always simple to obtain, they can be easier to get for a potential franchisee than an individual business owner because the franchise is already established.
- Government backed programs – A couple of options for financing from the government include the Canada Small Business Financing Program and the Canada Digital Adoption Program. You can also utilize the Business Benefits Finder for more options.
- Franchisor financing – While not widely available, some franchisors will offer a financing option to a potential franchisee that might cover start-up costs and/or equipment costs. These loans could include terms like charging interest on sales or not requiring a loan payment for one, five, or even ten years after the franchise has opened.
- Retirement account – Canada has two principal retirement account options: Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA). It is possible to use this money to buy a franchise, however withdrawing from the RRSP comes with heavy tax penalties.
- Angel investment – An angel investor is someone who invests money in exchange for equity in the business. The National Angel Capital Organization (NACO) reports that Canada has anywhere between 20,000 and 50,000 angel investors.
- Friends & family – Sometimes a friend or family member is willing to give the amount of money necessary for buying a franchise. While the benefits include less bureaucracy and likely more flexible loan terms, the downsides include not building your credit history and any potential conflicts that could arise among a lender you are personally close to. If you decide to borrow money from a friend or family member, make sure you make a formal arrangement.
- Online marketplaces & intermediaries – An example of an online marketplace is Boefly, which allows a potential business owner to make a loan request and then matches it to a compatible lender from its database of lenders and banks. After that, it’s up to the two parties to complete the loan process.
Financing a Franchise in Canada is Complicated – Get Help!
Are you thinking about buying a franchise in Canada? Fortunately, there are several options for financing this endeavor. Make sure you speak with a knowledgeable franchise consultant at FranNet for guidance. Our services are free to you, and we will help you understand your financing options. Schedule your free consultation today!