Franchise Financing – basics in franchise selection and financing process.
Many aspiring business owners participate in many quarterly franchise shows, where hundreds of franchisors showcase their business models and are trying to gain additional exposure to their products for potential franchisees and also financial institutions that are financing the expansions and acquisition of the franchises. Selecting the franchise is extremely important and responsible process for anyone aspiring to own their business, also selecting a financing method (normally come as a way of small business loan) is as important if not more important than anything from start to finish. We receive many inquiries about franchise financing and this is one of the series of articles in this regards covering the basics in franchise selection and financing process.
First of all, when our clients approach us with franchise financing request or request for small business loans for franchises, we ask our client if he or she has any experience in the line of business that they are hoping to enter. Very often people hear good things about some franchise and think that this is an easy way how to enter the business and make easy money. One of our favourite quotes is “free cheese is only in the mouse trap”. As everything else in this life starting or purchasing any franchise comes with significant costs, financial obligations and future liabilities and responsibilities. The last thing we would want our clients do is to enter business that they don’t know or understand. Most problems in the business come and go, without substantial experience in the segment, and also ability to deal with the difficulties most clients even after they received financing and launched the franchise stand no chance in the business because nothing comes easy, and normally first 2-3 years are super difficult and very often are not very profitable at all.
So what we normally ask if client has any business experience in the field they would love to work at, or if they ever worked in this field at the management level. If the answer is no, we normally suggest the client to spend at least 2-3 months working in the field, and many franchises allow some sort of working experience covering every single position in the business in order to see if client can handle the business at all. If such experience is positive, we would begin reviewing different options on how to finance the given chosen franchise with either special franchise financing programs, or through any of the government guaranteed small business loan programs. Because different franchises operate in a very different manner, and require very different financing sizes and terms, choosing a well-known franchises with good financing arrangements with prime banks is always a good idea.
Once a well-known franchise is selected, there are several very important things to discuss and understand when it comes to business financing. How much cash the client needs to put down in order to close the financing with the lender, how much cash is required for start-up costs, and how much cash reserve is required until business is expected to break even in its operational expenses. All of these items will need to be discussed with the Franchisor, and also with several active franchisees preferably in the area, in order to understand some local specifics. Many different franchises have different average time required to break even and “cook the location”. Before the break even is achieved there is virtually no other avenue where the franchisee can get any additional financing, therefore the items above are very important.
When all of the items above are verified and cleared, we normally go through several different lenders and programs that allow to put to gather required business loan for the franchise in mind. Different lenders have different criteria for most well know franchises. Our knowledgeable stuff work in the field every day with live updates on what is available and required to obtain such financing. Many lenders often close or postpone their programs for specific franchises creating havoc sometimes when many of the deals are live. We are well positioned to deal with the specifics of the business and normally achieve 90% of the planned business financing for most clients that pass the due diligence. If you have any questions please feel free to contact us any time for any further info, and we will continue series of articles on this and many other topics relating to business loans and small/ medium business financing.