The Ultimate Guide to Franchise Financing
When it comes to deal with financing a franchise for the first time, you will encounter number of things that you have never dealt with before. The process becomes all the more complicated if you don’t have a background in business or finance. However, getting help with finding the right loan and financing options for you can make the process smoother. While financing a franchise, you several options like – withdrawing funds from your retirement account, small business administration loans, financing through the franchisor, home quality loans, borrowing from family or friends, using your own savings, etc. to choose from. There are some steps you can take to multiply your chances of success, if you’re opting for any sort of loan or outside financing.
Go over the following list of considerations during your decision-making process:
- Understand the total cost of your purchase inclusive of interest rates, fees to secure financing, first six months operating costs and other factors.
- Determine the personal assets that can be risked as collateral.
- Be clear about the terms and conditions of default for the financing options being considered.
- Comprehend the way in which the total and monthly repayment costs work into your current and expected cash flow.
- Know the amortization schedule of the debt.
If you focus on the Capital, Credit, Capacity, Character and Collateral, you can make yourself into the ideal borrower. Regardless of how you decide to finance your franchise, there are five things you can do to increase your odds of being approved for the necessary financing.
- Talk to Your Franchisor:
In numerous situations, the first step will be to speak to the franchisor themselves about what the decision will be. Since the franchisor deals with multiple people in the same scenario as you, they will likely have some useful tips or suggestions for whom to approach for the size loan you need and they can walk you through all the expenses that you will need to have covered. Franchisors are there to make sure that you have the best chances of succeeding, so never be afraid to reach out and discover what your franchisor has to suggest. When you need help, they will mostly have a suggestion for what to do.
- Search for Lenders who Understand Franchises:
Having someone help you with the franchise financing details is crucial and beneficial. If your franchisor doesn’t know of a lender, then do look for lenders who have experience with franchise financing. The lender should have dealt with franchises of lower budget as well besides larger franchise operations; this is particularly important when you are purchasing a smaller business. To be precise, it’s better to make sure that the lender has dealt with franchises under 1 Lac INR. Some lenders have only financed larger operations that cost in lacs. So, it’s better when the lender knows to handle franchise of both lower and high budgets.
- Keep Liquid Capital:
If you have fair amount of debt already, and you want to finance for a franchise, you may want to pay off a large amount of that debt. No doubt that it can be good for some, but you need liquid capital in order to start your business, and paying off debt can significantly lower your liquidity. It is normal to have debt and lenders need to know that you have money available for this venture. Hence, though paying off a small portion to lower your total debt amount is good, you better not go overboard and sacrifice your capital for a lower debt amount.
- Create a Business Plan:
Any lender will want to see a well-planned out business plan inclusive of a financial projections section, before they commit to funding. Most of the times, franchisors will provide outlines for business plans to help you get started. The information in the FDD will also help you in business planning. It is fact that business may not scale-up rapidly as you like, which means your potential income steam may take very long to develop than you initially expect.
- Have your Collateral Money Ready:
Lenders want to know that you are directly involved financially. Most of the lenders will require 10 to 20% down payment to show that you have a vested interest in the financial success of your future franchise. And obviously, it is all the better if you can put down more than the required amount.
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