Article by Stan Prokop
Franchise Financing in Canada continues to be both a great opportunity as well as a challenge in obtaining the right financing, the right amount of funds, and most importantly the rates, terms and structures that will maximize your opportunity as a franchise entrepreneur. Clearly the concept of owning ones business in an already success and proven business model is appealing to many Canadian business people, men and women alike.
When clients come to us for franchising assistance they are focused on a number of key different areas relating to the financing and acquisition of their franchise. Many franchisees do not have a financial background – their experience is often based on their career and industry experience in the field they are looking to be a successful franchisee in. Therefore we encourage all franchisees to seek the advice of a credible, experienced and trusted financing advisor who can guide them through the franchise financing process.
So what are those prospective franchisees looking for? They are looking for the right amount of funds that will finance their venture to the extent that it can meet their profit expectations based on their own personal financial contribution, as well as of course the borrowed funds.
The century old phrase ‘character / capacity/capital ‘applies to all borrowing, and certainly franchise financing is no exception. The financier wants capable trustworthy borrowers who are prepared to make some sort of contribution of their own from a financial perspective. Credit quality of the borrower is one of the many factors in franchise financing. It is certainly not impossible to get financing if you have either a low net worth or a tarnished credit score, but it certainly becomes more challenging.
As a franchisee you want fast turnaround in the financing component of your new business. Our experience is that if the owner is properly prepared, with a decent business plan and all the necessary miscellaneous documents, that a franchise financing can generally be completed within 2-4 weeks. Miscellaneous documents that are part of the entire financing process include your personal financial information ( net worth, etc), as well as items such as your executed franchise agreement, proof of deposit, your premises lease, etc. Some clients come to us for a 5-7 year term financing for their new business, but they only have a 3 year premises lease. Your premises lease must match the term of your loan, that’s just common sense. If there is no premises there is no business, and therefore there is no loan payment. Again, just common sense.
Franchises in Canada are financed in several different ways, the major method being a specialize loan program called the CSBF program. Additional financing is done via term loans for working capital, equipment financing for hard assets. And generally a small operating line of credit at the opening of the business.
In the current more challenging financial and economic environment we believe the best franchise financing is achieved by combining several of the above financing options in a structure that makes sense for the business based on cash flow repayment ability and the collateral involved. Many soft costs such as franchise fees cannot really be financed, so they are often taken care of with the franchisees own investment portion of the total venture.
As a general rule it is somewhat easier to finance the purchase of an existing franchise, as the assets, cash flow, and overall value of the business are more established.
So let’s recap some key bottom lines on franchise financing -
- Start your financing discussions and preparation early on in your business venture process
- Determine what mix of financing you need, which will be combined with your own investment
- Ensure you have a proper presentation and business plan – if you don’t have one get one done by an expert
- If you don’t have a financial background seek the advice of an experienced franchise financing advisor who can work with yourself and the franchisor to get the best total overall franchise financing solution for your proposed new business, relative to rate, term and structure and any collateral required.
That is a successful franchise strategy.
Stan Prokop is founder of 7 Park Avenue Financial – http://www.7parkavenuefinancial.comOriginating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing, the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size. For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/Franchise_Financing_Canada_Canadian_Solutions.html