Franchise Financing – Loan approvals in Canada

Franchise financing approval in Canada is a key aspect of the entrepreneurs challenge to purchase and build a business. Canadian business people purchase franchises because they wish to profit and be successful on an already proven business model. We of course assume they have picked the right franchise!

What mistakes can be made in franchise financing as it relates to the purchase of a new or existing franchise?Naturally solid planning and careful preparation of a business plan increases the chance of success.

Whether a business is a franchise business or not the under pinnings of a successful finance strategy are important to long term success. Business owners, bankers, other lenders and financial analysts always look at the relationship between debt and equity – in simply language that means how much you yourself are putting into the business and how much you are borrowing. If you borrow too much you are considered ‘over leveraged. Therefore in the course of purchasing your franchise you should be prepared to make a personal investment in the business also – that’s a given – it cannot all be OPM, which is and an acronym for ‘Other Peoples Money ‘.

So of course when we meet with clients they always ask ‘how much do I have to put into the business? The answer is as follows – many franchisors will actually insist on a certain amount of money being put down , because based on their actual experience with their own locations and other franchisees over time there develops formulas as to what is an optimal investment byyourself .

Also keep in mind that if you, as an example, are purchasing, say, a large unit of a restaurant chain that transaction might be in the 1 Million dollars range. Let’s say you put 25% down of 250k. Another franchisee might be buying a service oriented business that does not have and furthermore does not require fixed assets such as leaseholds, equipment, etc. If that business cost 100k to purchase a 25% down payment is of course only 25k, much less than the 250k other franchisee had to put down in absolute dollars. So our point is simply that if the purchase price of your franchise is asset intensive, and has a higher dollar value you must naturally assume that a large absolute dollar amount of financing is required. That probably is clearly the appeal of many service based franchises that do not require assets.

So how are asset based franchises financing in Canada. There is in our opinion a large amount of dis information on franchise financing in Canada – therefore new and prospective franchises are encourage to speak to a trusted and credible franchise financing expert . That is simply because you will know your options and strategy much better. It certainly doesn’t hurt, if you can, to speak to other franchisees in the franchise system that you are looking at purchasing.

In some respects there is a benefit to purchasing an existing franchise from a current franchisee in the system you are looking at. Our observation is that those units come with a higher price, for the simple reason they are proven already, they have sales, profits, and cash flows that you can analyze , with your franchise financing expert, to determine the overall viability ofthe business .

We have worked with a number of prospective franchisees who actually are comfortable in buying a franchise that is not doing so well because they strong feel they can turn it around. So there are in effect buying a business that is proven, but temporarily distressed in some manner, usually relating to issues such as poor sales revenues, etc.

Franchises in Canada are financed predominantly by one major government program that is in existence – we have found that by utilizing this program, and complimenting that financing with a working capital term loan and lease and equipment financing (if applicable) helps to ensure overall franchise financing success.

In summary, ultimately you as a business owner have to be comfortable with what you are purchasing – but you should also take comfort in knowing that franchise financing is available in Canada, and simply needs to be tailored to the type of business you are buying, its size and asset requirements, as well as the utilization of proven and available financing methods such as the government CSBF program we referred to.

Investigate your opportunity, plan financing carefully, execute on that financing and your chances of success increase immensely.

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Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/franchise_financing_loan_approvals_in_Canada.html