After all the euphoria is over re: having made that decision to purchase a franchise a minor problem usually occurs - the cost, and how to finance that cost ?!
It's safe to say you need to pick an ' affordable ' franchise. That's not as negative sounding as you think, since a large portion of your franchise cost can be financed depending on which financing option you choose. However, lets be clear, there are only two components to any business purchase, debt (what you borrow) and equity (what you put in).
A good rule of thumb these days is a 30 -40% owner equity contribution. That ratio isn't one that is cast in stone, but is one that we see works constantly for many of our clients.
Remember also that as large as that financing challenge might be that you actually simply have to show that the funds you borrow can be repaid through your cash flow and profit projection. Actually cash flows pay back lenders, not profits. More about that shortly.
In a franchise purchase there are what we call ' soft costs ' and ‘hard costs'. The soft cost traditionally is things like the franchise fee - usually the largest soft cost on your project. Naturally it makes sense the hard costs are things like equipment, leaseholds, even perhaps real estate in some cases.
Financing soft costs is a challenge for any business in Canada. So typically the franchisee should cover them thru his portion of the equity injection. But what about those leaseholds and equipment?
Here's the great news. Financing a franchise in Canada is mostly done through a unique and specialized government loan program called the BIL / CSBF program, monitored by Industry Canada, and administered by Canadian banks under the auspices and watch of the federal program.
Is the BIL a great program? We let our clients be the ultimate judge, but in our humble opinion it provides, bar none, the best finance options for a huge amount of the Canadian franchise industry. The bottom line on the program? Simple. Great rates, terms and flexible structure, and are you ready, a limited personal guarantee. Even the big boys in business in Canada cannot often escape that one!
When clients ask us for some basic key tips and advice on dealing with a franchise lender, or even isolating who these lenders are we always revert back to BOY SCOUT MOTTO 101 - BE PREPARED! Being prepared is simple, but requires a razor sharp focus on having a crisp business plan in place, some financial projections that guess what, make sense! It should be a document that covers your experience, highlights your purchase, and most importantly, shows how you will succeed financially - i.e. pay back the lenders based on the financing options you have chosen. Simple as that.
Are the BIL finance options the only method to finance a franchise? Definitely not, there are some independent finance options out there, and in many cases we supplement the overall financing plan with equipment loans and working capital financing, which also has to be addressed early on in your planning.
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