How to finance a franchise in Canada becomes an immediate and looming decision # 2 , right after your having made that choice to enter this industry as an entrepreneur / business owner .
But what about the financing costs for yourself, the new franchisee? What is financeable, what is not, and who can you turn to for help, guidance, etc.
Naturally it goes without saying that the actual financing of your new business can be the difference between making it… and the other less then favorable option… failing.
Let’s examine some key franchise basics for the Canadian entrant into the industry. Where is that financing going to come from? It general it boils down to two parties, you with some type of equity / down payment component, and a financing partner. That financing partner can potentially be two finance firms, one specialized firm, or a bank. More about the bank later… and trust us, its good news!! Not what you might be thinking!
You will notice that we have eliminated one party that many new franchisees think they are going to get help from, and thats your franchisor! The reality is that although some indirect help should be expected you should not expect a cheque from them to help finance the franchise. Why? They are in the selling business, not the finance business, as simple as that.
It’s important to spend some time in your business plan (yes, correct, you heard right … you need a business plan) to give some thought to and break down the actual components of the franchising costs. Those categories are typically assets, working capital, leaseholds and franchise costs. In some larger franchise purchases there might even be a real estate component to your deal, but thats a bit rarer. Oh and don’t forget that franchise fee!
One you have your breakdown in front of you its critical to start to determine what is financeable and what is not, and then focus on who is going to finance those components.
Typically the franchisee fee is not financeable in Canada… in essence we can call it the goodwill component of your balance sheet, just as it would be in the purchase of a business in a non franchise industry . That ties nicely into our next point, which is simply that your down payment or equity part of the deal typically also has to cover the franchisee fee. In a typical franchise in the 350k range in Canada we tend to see that fee in the 25k range.
Many business owners focus only the cost of the franchise and getting to the goal line on their purchase. They forget however that sales don’t necessarily start strong on day 1, and your fixed costs and payroll can catch up with you pretty quickly.
So don’t forget to take a hard look at the working capital component of you deal, which should be thought about, and addressed! in the business plan. Naturally working capital in the retail industry is a lot less of a requirement than in a non retail business … its the difference between a cash business and waiting for someone to pay you.
In Canada there are only 1 or 2specialized franchise finance firms which entertain a full financing of your franchise. If you don’t qualify for that scenario, or if your franchisor is not part of that program a solid solution is the BIL/CSBF loan program. It’s a government guaranteed loan that allows you to finance equipment, leaseholds, etc up to 350k, which covers a large majority of costs in most franchises. And by the way, interest rates, terms and structures are excellent, and you dont even have to personally guarantee the full amount.
Focus early on relative to you challenge of how to finance a franchise in Canada. Your business plan is key, as is your choice of financing partner or assistance. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your finance needs as a new entrepreneur in this major Canadian industry segment.