The Good, The Bad And The Ugly Of Financing Franchises Canada Franchising Loans

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Financing & Cash flow are the biggest issues facing business today.

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Financing franchises in Canada have the potential to be done right or incorrectly when it comes to the types of franchising loans that the potential franchisee might consider when purchasing a new or existing franchise. Note - Not all franchisees recognize an existing franchise can also be purchased. Let's dig in.

WHAT IS THE RIGHT FRANCHISE FINANCE OPTION FOR YOUR PURCHASE?

In a perfect world ( it's not ), you want to have the ability to assess every financing option you have and pick the one that is best suited to your needs. Some of those choices might be what we can call' traditional ' - some might be creative or alternative in nature.

While industry associations tout financing as a key initiative for the industry, the franchisee often finds it very frustrating to source (promptly) the capital they need to acquire the business.

It's all about you, as the franchisee and the lender(s). Let's examine the key elements that allow you to assess the amount of risk you personally are willing to take, as well as the risk any lender perceives in yourself and your transaction.

LET 7 PARK AVENUE FINANCIAL SHOW YOU HOW THESE FRANCHISE FUNDING OPTIONS WORK?

Let's examine 6 options:

1. In certain cases, the franchisee can, via personal resources, pay cash for the entire business purchase. Whether that’s driven by pride of ownership or fear of borrowing, there are pros and cons to this option. As a cash buyer, you are in a position to have no debt and financing costs associated with a franchise loan.

That heightens your probability of success but at the same time puts all your investment 100% at risk if the business falters or fails. We have encountered numerous clients who have tapped out all personal resources and become at risk of failing when an initial stumbling block such as falling sales occurs. Remember that even the largest corporations in Canada recognize it's good to have some debt to experience maximum return on investment based on the mix of equity and debt.

2. Traditional loans - typically, bank loans and banks-very rarely finance franchises on an as-is basis. If they do, they will require owner equity and collateral, many times more than the investment you require. Additionally, many industries are out of favour in some respect when it comes to traditional bank loans.

3. Many franchisees collapse personal savings such as registered accounts, or in some cases, collateralize their homes to complete a franchise financing. Here again, both the overall risk as well as tax implications often don't make sense when it comes to financing franchises in Canada in this manner.

4. Supplemental financing solutions - These are great and can complement the financing of your business. They include working capital term loans, merchant advances, equipment financing, and credit lines secured by inventory or receivables. While often not able to facilitate the entire financing, they often can help complete a transaction nicely.

5. Franchisor financing - the bottom line, almost no franchisors finance their franchises in any manner. They sell franchises and either don't have or want to commit the capital to complete a franchisee sale. The real solution is to finance the business via a specialized franchise finance firm associated with the franchisor. There are really only two n Canada at the time, and their scope is somewhat limited to larger well-known chains.

THE CANADA SMALL BUSINESS FINANCING PROGRAM IS ONE OF THE MOST POPULAR METHODS OF FINANCING A FRANCHISE BUSINESS

6. SBL Loans - The Canadian CSBF program is a government-sponsored bank loan that finances thousands of franchises. While not originally designed to finance franchises, it has become a 'go-to ' for many franchisees. The program has great rates, terms and structures, in some cases even better than traditional financing! The one caveat is that the program only finances equipment, leaseholds and real estate.

WHAT ARE THE REQUIREMENTS FOR A FRANCHISE LOAN APPLICATION?

Which solution is right for you? As we have seen, some are great; some are not so great and, in fact, bring additional risk to the table. Also, ensure you have a proper business plan and cash flow forecast and a personal inventory of your financial net worth and the capital you can contribute to the business. 7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements.

CONCLUSION

The best solution? Seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with franchising loans that make sense for your situation.