Buying a franchise also comes with certain risks and can lead to poor financial performance or, in the worst case, failure. One of the key success factors in buying a franchise is getting the right business loan.
Whether you are investing in a franchise or starting a business, you should use a strategic approach that includes evaluating different financing options. You may want to look at Franchise Direct for further inspiration.
What is the definition of a franchise?
Franchising is an economic development model based on a commercial agreement between a brand and an independent entrepreneur. In other words, it is a mode of commerce organized within an independent network. A franchise contract then legally and financially binds the franchisor to the franchisees, for a fixed period of 5 to 10 years.
If the commercial franchise appears today as a mode of profitable entrepreneurship, it is because its economic system has proven itself. Rather than buying new points of sale, the franchisor decides to delegate their operation to independent companies. They and the franchisee are thus subject to much less financial risk.
However, not every business can become a commercial franchise. To franchise a concept, it must be both original, profitable and duplicable. Beforehand, the franchisor must call on a pilot unit in order to test and approve the operation of its franchise concept.
1. Determine the total purchase cost
The price of a franchise does not include the working capital you will need to make it operational. It often happens that entrepreneurs run out of cash just a few months after buying the business. When you apply for a loan to purchase your franchise, it pays to include sufficient working capital. Entrepreneurs should look beyond the loan interest rate and consider other factors that will help protect their working capital.
2. Compare the offers
It is good to consult with different institutions regarding your funding needs. You could benefit from advantageous terms in addition to diversifying your sources of financing to reduce risks.
3. Understand the terms of the contract
Franchise contracts can be very different from one franchisor to another. It is essential to know who really owns the lease of the premises occupied by the franchise and what are the terms of reimbursement, royalties or revenue sharing.
4. Assess your ability to invest in the business
It’s good to save for a down payment and have cash to cover operating costs. However, it is equally important to be able to inject capital into the business if sales are not as good as expected, which is often the case in the early stages. You have to have money set aside, whether it’s your own assets or your bank reserves.
5. Prepare your documents
Financial institutions usually require a draft franchise agreement, the franchisee’s personal balance sheet (including equity), and a business plan. Once the business loan is approved, entrepreneurs should not hesitate to get help operating their franchise. It’s often good to have the benefit of coaching from a business advisor in the first few months or years of operating the franchise.