Financing a Franchise In Canada

Financing a franchise via a Franchise loan or lending arrangement is probably the 2nd largest concern that any potential Canadian entrepreneur has - (we are assuming pick the right type and size of business is the largest concern?!).

So let’s assume that as a Canadian entrepreneur you wish to either purchase a new franchise, or in some cases purchase an existing business that is has already been in business and being sold by the new franchisee. There is actually a third scenario also, in that you might already be a franchisee and wish to either purchase another unit or invest in another franchise business within a different industry .

The bottom line though is that after you have made that decision financing of your new business quickly becomes ‘job 1’. The challenge is two pronged of course –

1. Finance the purchase of the franchise

2. Ensure you have a solid understanding of the long term financing needs of the business from a view point of increased investment required for growth, survival, and continual profitability. ( A good example is if you are purchasing a restaurant franchise – you should clearly investigate what further upgrades to leaseholds and equipment might be required for you to maintain your franchisee status , or simply to grow you business and stay ‘ fresh ‘ at the same time .

In Canada you certainly don’t have what we would call ‘numerous ‘choices to finance a franchise, but there are several what we will call strategies or programs that can assist you to complete financing successfully. We tell clients that we can’t over emphasize the importance of dealing with a trusted, credible, successful and experienced advisor in this area. Just on piece of advice or experienced from such a party can save you thousands and potentially save the regret of having purchased the wrong business, or financed it incorrectly.

We recently met with a client who had chosen what we will call for confidentiality reasons a ‘service’ business. The business was financed all through personal equity – that simply means of course that no funds were borrowed. Sounds good so far right, wow... a business with no debt. Well, here’s what happened, sales didn’t materialize, cash flow dried up, all personal resources, including sale of the family home, had disappeared. And the business was no longer financeable from a loan perspective because of the poor fundamentals. In reality the business should have been financed with some debt, so that any shortfall in revenues could be augmented with personal resources for a temporary period.

So how are franchises financed in Canada? ask our clients . They are financed via the following mechanisms –

- Owner personal investment

- A special loan guarantee program by the Canadian federal government

- Lease financing for equipment

- Some for of vendor take back in certain unique situations

- Cash working capital term loans to augment the owner investment

In a very small, and we repeat, small! Number of situations the franchisor themselves might provide some financing. This is rare and should never be counted on – for the simply reason that franchisors make their money selling franchises, not holding and financing them.

So lets recap our basic shared information – it’s simply as follows: Carefully pick a franchise that suits your skills, interests, and financial investment profile. Ensure you properly mix the right amount of debt and equity – too much of either is rarely a good thing. Work with a trusted business financing advisor in franchising to ensure you avail yourselves of the proper mix of the 5 methods we outlined above. That’s a successful Canadian franchise financing loan strategy.

--

http://www.7parkavenuefinancial.com/Financing_Franchise_Franchise_Loans_canada.html