You Are Looking To Finance a Franchise via a Business Loan!
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Not only do you want to have a solid plan when you want to finance a franchise in Canada - it sure helps when that plan makes sense for the business financing loan(s) that you need!
We think that most Canadian entrepreneurs who are either first-time franchisees or perhaps are adding another location to their business would agree that it's not as important as to where the franchise lending and business funding come from, but that you get the full funding at terms that make sense for you personally.
Let's examine some of those key decision points and requirements that you need to fulfill a proper franchise financing solution in Canada.
We think that a lot of franchisees are sometimes overly focused on 'the interest rate' when they are seeking a franchise loan. That’s human nature we guess, but the reality is that the loan is simply commensurate with your overall credit quality and in line with the types of financing that are out there in the Canadian business financing market - unfortunately, that market for new franchisees is somewhat more limited than in the U.S.
In Canada franchises are financed really in only 3 or 4 different manners -- actually 5 we could say if you considered financing the whole franchise yourself through personal savings.
While that might seem a good idea we think in many cases it is not for a variety of reasons - i.e. collapsing personal investments and savings and assets when you don’t have to can't be an overall great strategy. We spoke a while back to a franchisee who had pledged and used all his personal assets to acquire a franchise - business was slow, and he was unable to secure additional outside financing to reboot the business because all his personal assets were pledged/gone. Bottom line, not recommended!
So the question then becomes as to how you decide to finance a franchise once you have made that acquisition decision. We'd like to share a couple of key points. First of all, whether it’s a franchise or any business whatsoever, it’s financed by two guys, debt, and equity; i.e. what you borrow and what you put in yourself. Spend some time determining the optimal mix and you will best be able to gravitate to the right financing strategy.
In Canada these days we see franchisees putting in anywhere from 10-50% as their personal investment into the business. What's the perfect number? The reality is there isn’t one, because each business requires a different amount of financing and has a different mix of assets and financing needs. The key assets and financing needs in franchising are all your initial soft costs, such as the franchise fee, and then comes your costs to open the door, often called the 'turnkey'. That turnkey component consists of equipment, leaseholds and opening working capital.
We spoke of 4 methods of franchise financing in Canada. Those are as follows: Specialized commercial finance firms that have dedicated franchise finance divisions, Equipment Financing, Working Capital term loans as a supplement to your overall financing, and finally the BIL/CSBF loan. The latter is the government SBL loan that is used by hundreds, probably thousands of franchisees to acquire their franchise. It only has one or two limitations, one of which is that it caps out at 350k, but that certainly covers a lot of franchises in Canada in different industry segments - examples restaurants, service businesses, etc.
So, today’s bottom line? Simply that spending some quality time early on in the process to understand which of the 4 options makes sense for you is a valuable investment. That time, coupled with your business plan and financial projections will help you ensure that you have the right mix of financing solutions, as well as a properly chosen business loan strategy for your franchise.
Speak to a trusted, credible and experienced Canadian business financing advisor on how to best decide which financing mechanism works for you.
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