So … you want to buy a franchise. Why then our analogy to a GPS system? Simply because that type of gadget these days provides you with a road map for not getting lost, and from our perspective, getting a franchise loan is the last place you want to be lost and not knowing your position. Make sense? We think so.
Loans for franchises in Canada can be a combination of an exhilarating process and a frustrating one – the former referring to being approved and the latter referencing our conversations with clients who have been frustrated by the process.
Let’s share some solid “road map” type information on ensuring that you minimize the time and risk when you buy a franchise and consider a franchise loan. The reality is that in many ways we could make a case that ownership via a franchise business is actually significantly less risky that other types of businesses that are viewed as “start up” in nature.
The challenge becomes knowing which institutions and programs will make your franchise investment happen. It’s a common fact that a large majority of business funding requests by entrepreneurs fail simply because they are poorly presented. So knowing how you can easily pre-qualify yourself, and putting together a basic package that presents you and your new business in the best manner is well, worth its weight in “money!”
In Canada franchises can be financed from a turnkey point of view, or in some cases you may wish to acquire a franchise from an existing franchisee in the system you are looking at. It’s ironic, but one of the lesser known but larger challenges in the Canadian landscape is the ability of current franchisee’s to add additional units to their first location .
So is it possible to pre-qualify yourself? We assure clients that a large part of that process can be done by themselves. They must demonstrate some level of either specific industry or general business experience, while also showing the lender that they have run their personal lives from a financial perspective in a manner that reflects solid stewardship. That means having a solid credit bureau score (650 tends to be the magic number), and it certainly helps to have assets such as a home, savings, etc.
We don’t suggest or recommend to clients that they leverage all or a very large amount of assets when considering loans for franchises. But certainly anywhere from 10 percent to 50 percent of a purchase price typically needs to be covered off by the franchisee. That’s your “owner equity.”
You establish the amount of financing you need by putting together a fundamental business plan around your opening balance sheet. That will reflect your own cash investment, funds you have spent already and what is needed to get you to a turnkey grand opening! That typically is equipment, leaseholds, perhaps real estate, etc.
In Canada, franchise loan financing is generally done via an independent commercial finance company or the bank. But when we say the bank we are actually referring to the CSBF program, which has provided thousands of franchise loans at terms typically enjoyed by established businesses.
So is there a guaranteed GPS road map to a business franchise loan. Never 100 percent, but you can get very close to that by pre-qualifying yourself realistically, putting together a solid package and ensuring you know who finances loans for franchises in Canada.