The priority of securing business money when you have selected and are starting a franchise becomes even more important as you focus on getting the business started and up and running.
Let’s discuss some of the sources of capital in the Canadian franchise environment, and we’ll share some tips and strategies that have helped many other clients looking for Canadian business financing in the franchise environment.
There are actually 5 sources of capital that will successfully allow you to complete the financing of your new business. They include your own equity injection into the business, i.e. your down payment, bank and institutional financing (its not what you might think, so stay tuned on that one ), asset financing via an independent finance company, and finally a potential vendor take back from either the franchisor of the existing franchisee from whom you are buying the business.
Let’s therefore backtrack a bit and hopefully give you some solid tips and new information around how this financing is, in our words ‘ cobbled together ‘ to give you a total financing solution for your new business.
It’s always the same question when we talk to clients… ‘How much do we have to put in ‘… they are of course referring to their owner equity investment into the business. The truth is that the amount varies when it comes to the financing portion of your business. That amount is flexible and can vary anywhere from 10 – 50 per cent depending on the size of the financing and the amount of working capital you want to have on hand d on day once that will allow you to finance the business properly.
Another tip we’ll share in the above mentioned ‘ owner equity ‘ area is simply that in many cases some franchisors will actually mandate how much you ‘ have ‘ to put in. We therefore recommend to all clients that they get a clear understanding up front so there are no surprises. In defense of the franchisor they are probably relying on their own experience that allows them to have determined over time what it takes to successfully run and grow one of their units in their franchise system.
So how exactly do the banks in Canada participate in the starting of your franchise? Is it as simple as approaching your bank and determining what business money they will lend to finance a franchise? Not really we tall clients. We have rarely if ever seen a direct term loan to cover the financing of a franchise. But yet the banks do participate in most of the franchise financing in Canada. How? They piggy back on a special government program called the BIL/CSBF programme. This loan is underwritten by Ottawa, and has very generous terms and conditions around rate and structure. Unbelievably you are actually only guaranteeing personally 25% of the loan, which is another benefit.
So our cobbling together of a financing package is getting there – another great strategy is to finance separate individual assets with an independent lease firm. This type of asset financing is easier to get approved, and can cover a significant portion of any assets that need to be financed.
We spoke of a potential vendor take back from the franchisor or existing franchise as part of the purchase package. We will share with you several tips and comments on this one – namely that you should not fully rely on getting this type of financing in place. Occasionally you might be successful, may times you wont. Why? Simply because the franchisor or existing franchisee is motivated to sell you a franchise, not finance it!
Speak to a trusted, credible, and experienced Canadian business financing advisor in the area of starting a franchise and getting the right business money in place to allow you to complete your new role as a Canadian entrepreneur.