Financing your Franchise

Usually, the only obstacle getting between you and your dream of opening a successful franchise is financing. This can be very stressful yet it need not be. Here are a few guidelines to help you finance your franchise.

Firstly, it is very important you conduct an assessment of your own resources. Chat to friends and family members who mentioned helping finance your franchise. Prepare a personal financial statement for yourself and make copies of your tax returns for the past 2-3 years. Both the lender and the franchisor providing finance for your franchise will want to see them.

If you do not already have an accountant, it is definitely time to obtain one. Obtain references of an experienced accountant from friends and family. Preferably choose an accountant that has experience in handling franchises. Once you have chosen an accountant, discuss your plans, show him/her your personal financial statement and any other claim information in the UFOC needed. Talk about exactly how much financing you still require and ask your accountant to recommend a banker he/she has dealt with.

It is important that you speak to your franchisor. In 30% of all systems, the franchisor will provide financing directly or through a third-party lender. Franchisors provide financing because they need to attract franchisees. Even if the company does provide financing however, it most likely that it will be only a portion of your total needs. Therefore, your next step is the bank and the SBA.

The SBA (the US Small Business Administration) guarantees loans for private bankers or lenders. The popular loan program is a loan up to $100 000. By providing a guarantee of 80-85% of the total loan balance it makes it easier for a bank to approve your loan. If you fail to make loan payments, the bank turns to the SBA for payment of up to 80-85% of the initial loan.

Talk to your banker about your plans and explore their different programs. In order to obtain a loan, it is important that you organize your documents and make sure your credit and employment history is satisfactory. Also, the bank is going to look to you for good collateral so make sure your personal assets are sufficient enough in case anything goes wrong.
With regards to the different types of loans, you can choose intermediate-term loans or long-term loans. Intermediate loans usually run less than three years. These loans are generally repaid in monthly instalments from a business’s cash flow. Repayment is often tied directly to the useful life of the asset being financed.

Long-term loans are commonly set for more than three years. Most long-term loans are between three and 10 years with some even running for as long as 20 years. Long-term loans are secured by a business’s assets and typically require quarterly or monthly payments taken from profits or cash flow. This loan usually carries wording that limits the amount of additional financial commitments the business may take on and sometimes require that a certain amount of profit be set aside to repay the loan. Loans carry fixed interest rates and monthly or quarterly repayment schedules and include a set maturity rate. Rates vary and therefore it is worthwhile to shop around. Rates usually run around 2.5 points over prime for loans of less than seven years and 3.0 points over prime for longer loans.

Once you have obtained sufficient capital and loan requirements, you are ready to start-up!

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