Financing is one of the most important processes when buying a new franchise. If you have any experience in finding business loans, you know what to expect from the financing process. A franchise, however, offers slightly different opportunities and challenges from financing your own company. Here are the basic steps when moving into the financing process of your top-pick franchise option:
1. Pick a Healthy Franchise:
This may seem obvious, but your franchise choice does affect the type of credit you can qualify for. Even when visiting commercial banks and investors, they will probably take a close look at the franchise you are choosing. Lenders like to see a strong franchise with a solid financial history, a recognized brand, and the ability to product steady income. This will make it far easier to acquire financing for your start-up – plus, a healthy franchise is more likely to offer consultation for financing help.
2. Ensure a Great Credit Rating:
The next step is a close look at your own finances. You need an excellent credit rating and credit history to qualify for your own financing. Take care of personal debts and unpaid loans that may hamper your chances at getting a business loan for the franchise. Credit card debts and unpaid debts are especially poisonous: Lenders prefer to see a clean credit history with stable debt and no history of missed payments at all. Prepare your tax documents and account information accordingly.
3. Talk to Your Franchisor:
Franchises are often willing to help you out when it comes to getting financing – and not just with friendly advice. The larger franchises frequent offer financing programs of their own. These options are likely to be your easiest source for a loan, but study the terms carefully before committing. You may be able to find better terms elsewhere if your credit is strong enough…but financing from your franchisor is often the best bet.
4. Find the Likely Lenders:
If you still need financing help after talking to your franchisor, pick out the most likely lender options. High on the list are any government-assisted loans or programs that you qualify for. These offer competitive loans with terms that are very friendly for business owners. Next are commercial banks that often make a practice of loaning to small companies and entrepreneurs. Last on your list should be small banks, friends, and angel investors, who are more difficult to find and rely on for large loans.
5. Pick Your Collateral:
Business financing almost always requires some type of collateral. Explore your collateral options and pick the assets that will work the best. Investment accounts, insurance policies, holdings in current business activities…all are possible collateral options. You may want to take a loan out on your house (or a second mortgage) instead. Banks will need proof of your collateral options, so gather the necessary documentation as you look for likely assets.
6. Prepare to Answer Any Business Questions:
Working with a franchise makes this step much easier: Many lender questions can be answered by looking at the franchise business model. However, you should still prepare a business plan, five-year income statements, and other necessary business documents for inspection. Think of any questions you would ask in the lender’s position, and prepare the proper answers.
7. Work the Debt into Your Long-Term Budget:
Once you know what your business liability payment plan will be, work it into your franchise budget. Make room for monthly debt payments and calculate what your profit margins need to be to pay off all expenses while still making your target goals. This will help you keep your finances solid in the years to come and avoid any difficult time-crunches when paying off those loans, despite changes in revenue.
Lauren Thomas is a professional blogger that provides information on getting started in investing and buying a franchise. She writes for BeTheBoss, where you can find the top franchise opportunities in Canada.