We guess they call it ‘ crunch time ‘. As far as you are concerned your chances of success are excellent… now it’s time to find the business financing you need for your franchise… from lenders that provide the funds you need.
Let’s ensure you’ve got the basics covered, starting with the amount of funding you need, and solutions for each part of that capital. I guess we’re saying also that in many cases you need to potentially cobble together a solution from a number of financing sources. It’s somewhat rare that one franchise lending solution is going to cover all your financing needs, simply because we’re talking about different classes of assets.
So what makes up a franchise structure? Typically there are several components – the franchise fee itself, potentially inventory, and equipment and leaseholds. Any business, whether its a franchise or not requires working capital for ongoing operations ; and remember also that a key component of that working capital are the royalty fees that you pay back every month to the franchisor . Typically royalty fee arrangements that we see all the time are in the 8% range, but that varies per size and type of franchise of course.
In order to determine your strategy and chances of success you have to spend some time checking one specific person out …that’s YOU! So that should be easy to do, right? Your ability to position your personal finances and your background and experience plays a huge part in franchise approval. One of the documents you’ll need is a PNW statement – a statement of personal net worth. A simpler definition – what you have; what you owe!
Your PNW form is assessed as a key part of the credit approval decision, in conjunction with your personal credit history. Remember that as successful or well known as your franchisor might be… from a lenders perspective you are still essentially a ‘ start up ‘. If you’re buying an existing franchise, we guess you could call it a re-start!
In Canada, similar to the U.S. your personal ‘ score’ at the credit bureau has to be over a certain threshold. The entire system is run on a scoring system with 800 being perfection at the credit bureau. So what’s a satisfactory score – we’ll share with you that in Canada the majority of lenders, of all types of business and personal financing rely on a score in the 650 range. And trust us… higher is better. This whole exercise also allows you to determine what amount of capital you can put into the business, as it’s not possible to get 100% financing for all your franchise financing needs – typically 10- 40% should come from yourself.
In assessing your overall financing situation take into consideration that the lender will quite often being factoring in a ‘ worst case’ scenario , one that assumes that perhaps your sales and profit and cash flow ( out of which you repay your franchise loan ) might not be as optimistic or real as you have positioned
Our theme today is of course ‘ doing it right the first time ‘. That’s where your business plan or executive summary comes in play. It should be clear, understandable, at the same time positioning you and the industry in a positive light. We advise clients that a key goal here is simply realistic financial projections, and don’t forget to include repayment of franchise debt! We’re often dismayed by how much none financially oriented clients spend for a business plan – a slick proper one should not cost you more than 1k in our opinion.
Doing some careful preparation in the areas we have discussed will help you ensure both final financing approval, as well as a shorter timeline than we see many clients suffer ring through. And help is only a call away via a Canadian business financing advisor who has credibility, experience, and can be trusted – ensuring you final business financing approval from your franchise.