Financing a Franchise in Canada: Exploring Your Options
Introduction
Clients who are contemplating purchasing a new or existing franchise in Canada are always asking how financing a franchise works in Canada.
The Canadian franchise industry is of course huge and covers almost every type of business in Canada. Certainly, the majority of franchises seem to be in the Hospitality and QSR (Quick Service Restaurant) industry, but in actuality, every type of business has some sort of franchise model attached to it.
The franchise concept is many entrepreneurs’ answer to the Canadian dream of growth and profits through business ownership and self-employment.
YOU'RE NOT ALONE!
You're not alone aspiring entrepreneur in Canada, dreaming of owning your franchise and steering the ship of your financial destiny The allure of business ownership, the prospect of becoming your boss, and the promise of profitability have made franchising an enticing venture for countless Canadians.
But franchise ownership is not a simple walk in the park when it comes to being a new business owner! It's a challenge that demands vision, strategy, and, most importantly, financial backing via commercial financing or bank loans.
Three Key Issues In Franchise Finance In Canada
Financing your franchise venture via business loans in Canada can be a complex puzzle, with various pieces that need to come together seamlessly.
1. How do you secure the funds required to turn your franchise dream into reality?
2. What are the business loan and financing options available to you?
3. How can you navigate the intricacies of the Canadian franchise landscape to ensure success?
Let the 7 Park Avenue Financial team demystify the process, exploring the available resources, and equipping you with the knowledge you need to make informed decisions on your path to franchise funding success.
We will cover specialized financing options tailored to the unique needs of franchisees, understanding why the right financial foundation is the cornerstone of a thriving franchise business. Let's dig in!
Diverse Options for Financing Your Franchise
It should not come as a surprise to Canadian entrepreneurs that there is no single option or solution for financing a franchise in Canada. The reality is that several possibilities exist, and in some cases, you must use a combination of these sources to complete the financing successfully.
Need a Business Plan?
Yes, you need a business plan to start a business or buy a franchise - 7 Park Avenue Financial prepares business plans for clients that meet and exceed bank or commercial lender requirements.
Government 'Subsidized' and 'Guaranteed' Loans
The main source of financing in Canada for franchising is a government ‘subsidized’ and ‘guaranteed’ loan from the Federal government. The program has two names, the CSBFL, and the BIL. These are acronyms for the government’s formal name for the program.
We firmly believe that this is the best program, bar none, for rates, terms, and loan structures in Canada. While the program is available and applicable to all Canadian businesses, the majority of businesses in Canada that are franchised fall under this program. The Business Development Bank also offers advice and guidance on securing franchise financing
Limitations and Additional Financing
That’s the good news, the less-than-good news is that in many cases you cannot complete your business franchise purchase with this loan financing on its own. Why is that? Simply because the program is structured and has limitations on what can be financed.
What Can Be Financed?
What can be financed under this program? The answer used to be 3 items only - The good news is that changes in the program in 2022 increased the financing capabilities of the program!
- Equipment Financing - *Note leasing companies can also assist in equipment acquisition
- Leaseholds
- Real Estate
- Franchise Fees
- Working Capital
- Misc start up costs
So if your acquisition of a new franchise involves anything other than these three items, additional financing sources are needed.
Those additional financing sources tend to come from your own personal resources, other structured term loans, and in some cases a vendor take-back from either the franchisee you are buying the existing business from or potentially the franchisor itself.
Don’t focus too much on the latter because in case you haven’t guessed by now, franchisors or master franchisors are interested in selling you a franchise so they can build another franchise unit into their network!
They aren’t in the finance business per se! That's important to note when it comes to ' franchisor financing"
The Benefits of the BIL/CSBFL Franchise Loan Structure
The benefits of the franchise loan structure of the BIL/CSBFL program are significant. For a starter, they carry only a 25% personal liability, and secondly, the rates (3% over prime) (In 2023 Canadian primes got quite a bit higher !) are excellent. Under the spirit of the program, the loan finances 90% of your eligible expenses. But don’t think that only a 10% equity or personal investment by yourself is going to get you approved. You should, in general, be thinking of anywhere between 25%+++ as your own personal contribution to the business.
Key Takeaways
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Understand the basics of how franchise financing works in Canada, emphasizing government-backed programs.
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CSBFL and BIL Loans: Explore the primary sources of financing, including the Canada Small Business Financing Loan (CSBFL) and the Business Improvement Loan (BIL).
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Eligible Expenses: Learn what can be financed under these programs, focusing on equipment, leaseholds, and real estate.
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Additional Financing Sources: Discover the need for supplementary funding beyond government loans, such as personal resources and vendor take-back options via an existing franchisee who is selling
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Equity Contribution: Recognize the importance of a significant personal investment via savings, home owner equity loans, partial cashing in on a registered retirement savings plan, tax-free savings accounts, etc, often exceeding 10%+, in securing franchise financing and demonstrating their own equity position.
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Loan Structure Benefits: Grasp the advantages of government-backed loans, including lower personal liability and competitive interest rates.
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Specialized Financing: Understand how franchise financing in Canada is distinct from general business financing, with tailored options for franchisees.
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Planning and Expert Guidance: Emphasize the significance of proper planning and consulting experienced business financing advisors for a successful franchise venture. Understanding royalty fees or revenue sharing obligations around advertising and marketing.
Conclusion
In summary, financing a franchise in Canada for prospective franchisees is a unique specialty type of financing. You don’t want to do it wrong the first time and endanger your prospects of success by poor planning and misinformation in the whole loan process
Call 7 Park Avenue Financial, a trusted business financing advisor who has credibility, experience, and a background in this area of Canadian business financing. With proper planning and assistance, you will be on your way to achieving the Canadian dream of business ownership through the franchise model.
More Information
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The Canadian Franchise Association (CFA): The official website of the CFA often provides industry reports and data related to franchising in Canada. You can visit their website for the latest insights.
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Government of Canada: The government's website may have information on loan programs like CSBFL and BIL, along with statistics on the number of franchises and their economic impact.
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Financial Institutions: Major Canadian banks and financial institutions often publish reports and articles on franchise financing trends. Check their websites or contact their business banking departments for information.
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Industry Publications: Look for industry-specific publications and magazines related to franchising in Canada. These often include data and insights on the current state of franchise financing.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is franchise financing, and why is it essential?
Franchise financing refers to obtaining the necessary funds to purchase and operate a franchise. It's crucial because it enables entrepreneurs to access resources, start their own businesses, and tap into established brand success.
What are CSBFL and BIL loans, and how do they benefit franchisees
CSBFL and BIL loans are government-backed programs in Canada that offer favourable terms and lower personal liability for new franchise owners. They benefit franchisees by providing accessible financing options with competitive interest rates.
Why do I need additional financing sources for my franchise?
While government loans cover specific expenses, additional financing sources are necessary for costs beyond equipment, leaseholds, and real estate. These sources ensure you have the capital needed for a successful franchise venture. Understanding the loan request needs of various alternative and traditional lenders is key.
How can proper planning and expert guidance impact franchise financing?
Proper planning ensures you make informed decisions, reducing the risk of financial challenges. Expert guidance from business financing advisors with franchise experience enhances your chances of securing funding and succeeding. Knowing what to do when sales fall short is also key to business success when it comes to cash flow management, cost control, etc. Franchise owners should ensure they understand their obligations under the franchise agreement.
Are there success stories related to franchise financing in Canada?
Yes, many entrepreneurs have achieved their Canadian franchise dreams with the right financing strategies. These stories demonstrate the feasibility of franchise ownership with the right financial approach.
Can I get franchise financing with bad credit?
Financing eligibility depends on various factors, including credit history. Explore alternative financing options and work on improving your credit to enhance your chances. In general prospective franchisees with 'poor' credit or ' bad credit ' are unable to obtain the financing they need from traditional lenders. Personal banking references and a good credit report reflecting a credit score of 650+ is often a good benchmark.
What's the typical interest rate for franchise loans in Canada?
Interest rates vary but are often competitive. They can depend on factors like the lender, loan type, and current economic conditions.
Are there government grants for franchise financing in Canada?
While there are no direct grants, some provinces offer programs to support small businesses, which could indirectly assist franchisees. Research regional opportunities.
What are the common challenges franchisees face when securing financing in Canada?
Common challenges include meeting equity requirements, navigating complex loan structures, and finding additional funding sources beyond government loans.
How does the Canadian franchise industry compare to international markets in terms of financing options?
Canadian franchise financing options may differ from international markets due to government programs and regulatory differences. Research specific country conditions when expanding internationally. In the U.S.A. the Small Business Administration via 'SBA LOANS' offers similar financing to the Canadian SBL program
What role do franchisors play in assisting franchisees with financing?
Franchisors typically provide support through guidance and may offer vendor financing in some cases. However, their primary focus is on expanding their franchise network.
