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We're never ones to be negative, so all we can say is that you can look at it as a problem or an opportunity. We're talking about how franchise financing lenders work in Canada. Unless we're missing something, you've just made the decision to purchase a franchise in Canada - so how exactly does the approval and funding of that loan work? We're going to clarify that for you, right about now..!
The positive aspect of our information is simply the fact that franchising is ' hot ' again. Of course, it’s always been around, and the actual stats on how much of the industry plays an important part in the overall economy is surprising to most. But when the world fell to its knees, financially speaking, in the 2008-2009 global recession (and boy did that include Canada) many industries felt the pain, as did franchises. Well, the good news is that's over.
Clients always seem a bit overwhelmed with all the different aspects of putting together their total plan for their new franchise business. That includes choosing the business that matches your skills and investment, picking a location, finding employees, etc. But the biggest challenge seems to be the financing of that purchase via a franchise loan.
So is traditional bank financing available for a pure franchise loan. We're not 100% sure we can give you a ' yes ' on that one, but don’t despair as you will soon see. We suppose if you have pristine credit, a high net worth, strong outside collateral and guarantors, etc. you could facilitate a term loan to purchase your business. That unfortunately is not the profile of many of the clients we meet that are looking for loan funding.
So what are those options then? In reality, the specialty finance firms that focus on providing only franchise finance are a very small number in Canada. There are more of them in the U.S., but that’s not our turf! The specialty firms that provide the financing for the industry in Canada focus on the large well-known brands that have lots of franchise units, strong franchisor financials, etc. That is only of course a small percentage of the total industry.
So what's the solution then if you're in the other majority, the hundreds or thousands of entrepreneurs who still require some major financing assistance? The answer is the Canadian BIL/CSBF program. It’s a customized federal program for businesses in Canada, with a loan funding cap of $350,000.00.
This program allows a Canadian bank to be your new franchise funding partner - mostly because the loan is guaranteed by the government so there is only nominal risk to the bank. Would the bank lend you those funds outside the program? As we said, maybe... but we're skeptical.
So if you are a new entrepreneur with a reasonable record of business success and experience how exactly do you proceed to qualify for your franchise loan purchase financing?
We going to break that down into a few key areas - they are focusing on the size of your investment, determining your own equity or deposit into the transaction, and then focusing on key fundamentals required for loan approval.
Key elements to focus on are ensuring you can prove you have a reasonable credit history. Prepare a business plan, or have a plan prepared for you, that focuses on you, the franchisor, the financial potential of your business, one that demonstrates you're ready to run a business, and, oh yes, repay that loan.
Typical investments by yourself in the new business range from 25-40%... and as far as that credit rating goes you should have a credit bureau score of 650+.
Is there one secret to getting a final approval? We think it’s a bit more complicated than that, but not as troubling as you might think. Focus on a business plan, presenting yourself properly during the proposal process. We point out to clients that every new business, small and large actually goes through these same processes.
We recently came across a statement that maintains the 'four Ps' of franchise success are people, purpose, payment and protection. In summary, a good business candidate, a good franchise pick, the ability to show you will be successful, and a backup plan if things don’t work out - example: spouse's outside income.
So can we summarize? Franchising is popular again today... the best franchise financing lenders are specialized firms as well as the ever-popular BIL/CSBF loan. Be prepared, and if you need assistance, consider seeking a trusted, credible and experienced Canadian business financing advisor who can fast track you to loan funding success for your new business.
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