Franchise financing in Canada is the final step in the puzzle for entrepreneurs who are hoping to start a successful business buy purchasing a new or existing franchise in Canada. Many clients we meet with tend to address the financing issues around their purchase much too late in the game, and by doing some carefull planning and research they could have significantly increased their chances of financing success.
The beauty of purchasing as franchise, as it relates to financing, is that as a business owner you are able to determine in advance the total amount of financing you will need to complete the purchase and open the doors to your business.
In Canada all small business financing for entrepreneurs is a challenge, and that certainly doesn’t eliminate the franchise industry. But the reality is tar franchising is viewed very positively by a number of organizations who like the fact that your business tends to be a proven business model that has a greater chance of financial success based on the infrastructure and marketing assistance of your franchisor.
There are 4 components to franchise financing in Canada, and our experience and advice to entrepreneurs is that that must in effect choose the appropriate mix of financing, as in general no one financing mechanism can suit both the full purchase of the franchise and the ongoing needs of your business.
So what are those four components? They are as follows:
Owner’s personal investment
Govt BIL loan
Equipment financing (if needed)
Third party working capital loan
The cornerstone of your financing is always the amount of your personal investment in the business. A couple key points need to be made here. They are as follows:
– The amount of your personal investment may in fact be mandated by your franchisor – they might insist on you having a threshold of net worth and personal liquidity based on their experience as to what makes a franchise unit in their chain successful
– When you put more money in on your own, as opposed to borrowing you limit the general business risk of having too much debt (However..!! We have met with many franchisees who put too much personal equity in the business are tapped out personally when additional financial challenges arise )
– Debt and equity is a balance act – it’s a balancing act for a corporation such as General Motors, as well as for your new franchise – we suggest you work with a trusted, experienced and credible advisor in this area to develop the right mix of debt and equity – i.e. how much you borrow, how much you put in.
Boy scouts use the motto ‘be prepared ‘of course, and you should plan on the financing well in advance of your purpose. Many franchisees we meet with are ‘ behind the gun ‘ in closing their transaction because they don’t have simple basics such as a business plan, cash flow plan, list of equipment and leaseholds they need, etc . Planning is a good thing; in franchise financing it’s a required thing!
Consider your franchise investment carefully, work with a trusted advisor, understand how franchises are financed, and finally, develop the right mix of financing that allows you to complete the acquisition and grow your new business for future sales and profits.