Franchise Financing - How Franchise Finance Works in Canada

Franchise Financing becomes critical to a prospective franchisee after he or she has made their selection to purchase a franchise. At that point clients always ask us - ‘How does franchise finance work in Canada?’

Naturally a large amount of time hopefully has been spent, as well as care! , in selecting the right business investment opportunity. Only one simply question remains, how does one pay for or finance the business.

One of the key aspects of that question is the type and size of the business you are purchasing.In some cases you are even considering perhaps purchasing an existing franchise from a current business owner who wishes to move on for whatever reason. (It is sometimes good to know why that owner wishes to sell of course.)

Size and type of business dictates the amount of financing you will need in Canada. We could generally lump franchise business models into two categories - service related businesses, or asset intensive businesses.Let’s choose a quick example - if you are buying a mobile furniture repair business all you need is a truck, some products and inventory, and you are in business. However, the purchase of a major restaurant franchise could involve hundreds of thousands, sometimes millions of dollars in leaseholds, assets, equipment, and on occasion even real estate.

So if finances are limited that might be one of the factors that you might want to consider focusing on a service business that is not asset intensive. Naturally just the type of business you purchase shouldn’t solely be driven around what you can afford; there are other factors to take into consideration also. These might include your personal interest in the industry, or even more importantly, your expertise. Example: Not everyone is cut out to be a restaurateur and deal with the public all day.

When financing a franchise you should also focus in on two key points - what funds do you need to acquire the business, and , as importantly, why financing is required on an ongoing basis for what finance people term as ‘ working capital ‘ . This would include ongoing investments you need to make in inventory, accounts receivable (if you are selling to a business) and in some cases equipment.

There are a handful of key options you can utilize to finance your purchase of a franchise. In Canada we can break these down into a few key components. The first component, and it’s a requirement also, is your own investment of capital into the business. No one will finance a business where the owner has not put in some capital. The majority of franchises in Canada are financed by a unique government guaranteed loan that is technically called the BIL programme. This program has attractive rates, terms and structures, but at the same time requires a lot of careful planning.

Because franchise financing in Canada is a niche industry we encourage clients to work with a respected, trusted, and experienced advisor in this area. The assistance you will get with cash flow planning, financing options, and access to franchise capital could make or break your overall success.

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Construction Manufacturing Equipment Financing – Options for New and Used Equipment

Construction Manufacturing Equipment Financing plays a huge role in the Canadian economy. Business owners and financial managers such as you want to ensure they have the best leasing and financing options available to them – It has continually been proven that financing equipment via leasing is a very cost effective option.

One of the many important features of such a financing is the ability to match his term of the lease with your expected use and residual value of the equipment. Generally equipment lease financing for used and new manufacturing equipment can be arranged for terms varying from 3 to 5 years.

No one knows better than the business owner what the useful expected equipment life of the asset will be, and we encourage clients to match the term of the lease financing transaction with the economic life of the asset. The reality is of course that construction manufacturing assets have significantly longer useful expected values – (as compared to assets such as computers!)

We encourage clients to work with a trusted, credible and experienced lease financing advisor. The benefit of such knowledge can save you many thousands of dollars based on the overall rate, term and structure of your lease transaction.

There are of course other financing options when it comes to the acquisition of such assets – those options could include a government small business loan or a term loan from a bank. While these might have a lower rate to the overall transaction they come with much more stringent credit criteria – heavy emphasis is placed on the balance sheet and income statement of your firm. Leasing in general places a larger emphasis on the expected value of the asset during the term and at the end of the lease.

Many customers don’t realize that some of the additional costs that relate to the acquisition of used and or new construction manufacturing equipment can also be financed – these include maintenance, installation, shipment, etc. That’s a huge cash flow and working capital benefit.

In certain cases your firm might already own such assets and you might want to consider leverage them through a sale leaseback for additional cash flow and working capital. That is a very solid financing strategy that many firms have taken advantage of over the last year, as cash flow and working capital availability tightened significantly during the global credit crisis of 2008 and 2009. Owners simply adopted a strategy of leveraging their equity in assets to stay liquid and competitive.
Many financial mangers simply view lease financing of such assets as a solid cash flow strategy, you minimize payments and match them to the overall benefits of the equipment you are acquiring.

Seek a trusted advisor. Focus on which benefits of lease financing are most important to your firm. Structure and acquisition that makes sense form a cash flow, rate, and term structure based on the value of the asset and your current financial condition. That is solid business planning for growth.

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Working Capital Financing – Canadian Corporate Financing Solutions

As a Canadian business owner or financial manager you are still somewhat bullish on sales and profit growth for 2010 – at the same time that growth requires working capital financing and corporate financing solutions that at times seem very challenging to achieve.

The reality is that small, medium, and even to some extent large corporations in Canada is demanding more access to working capital and cash flow financing – while at the same time the typical institutions who provide this capital are in fact denying access to many facilities that are required.

Business owners do not need to be told or hear about the difficulty and challenges in acquiring working capital facilities. Most firms think of Canadian chartered banks when they contemplate permanent or temporary working capital increases. This might be a bulge request for a temporary increase in their borrowing facilities, or sometimes a more permanent facility in the form of a term loan that might be tied to equipment, cash flow needs, etc. Various statistics are available which validate the difficulty that business owners have in obtaining working capital financing. Most of the needs seem to be short term based. In Canada unsecured working capital loans are available from the governments crown corporation bank, and, alternatively, through private independent financing firms. As the transaction tends to be a bit larger in size these loans tend to be called subordinated debt, or mezzanine type loans.

When a business is significantly smaller and can’t support the requirements of a more traditional cash flow or working capital loan Canadian business owners have actually turned to credit cards and personal equity loans to finance their business. This works, but comes at a higher cost. In general we believe clients we talk to want to separate their business finances from their personal finances.

Are their other solutions available to address working capital needs in Canada? Yes, there are several. One of the solutions you might consider is a working capital facility, also known as an asset based line of credit. This facility, available through specialty firms and advisors, generally significantly increases working capital while at the same time not bring on extra debt to your balance sheet.

Many clients we talk to don’t fully realize that they can unlock working capital that is in effect hidden on their balance sheets – It is a dual strategy of maximizing efficiencies in working capital, while at the same time leverage those current assets (most receivables and inventory, to their maximum borrowing power. These funds can help you avoid taking on more debt and allow you to grow sales and profits at the same time.

In summary, working capital and corporate financing solutions are in demand by Canadian business. Unfortunately supply is not fulfilling demand. Traditional solutions via Canadian chartered banks may not be available to your firm, and in some cases your firm might simply not qualify for the standard metrics around this type of loan / financing. Speak to a trusted, credible and experienced advisor who can suggest alternative solutions that deliver on cash flow and avoid additional debt. That’s a great business planning and financing strategy.

Financing for Equipment – Canadian Equipment Capital Options

Canadian business owners and financial managers, difficult times notwithstanding, continue to look for financing for Equipment, and have a strong desire to understand their Canadian equipment capital options.

While trying to achieve the best pricing in their negotiations with vendors business owners at the same time want to know they can preserve their capital, cash flow, and operating capital - lease financing does exactly that.

This type of business financing in Canada is an alternative to a cash purchase or a loan from a Canadian chartered bank. Clearly a win / win scenario is achieved when a business owner can acquire the information he needs, while at the same time achieving a solid financing structure around that acquisition.

Business owners can count on a number of sure fire benefits associated with the lease financing of equipment – those benefits may differ for each firm relative to their importance. However, more often than not they include the following:

- Canadian firms want to use assets to generate profits and sales – they don’t want to invest hard earned cash into depreciating assets

- If there are tax advantages to an equipment finance transaction they want to utilize or benefit from them

- If payments can be structured to suit the overall cash flow needs and working capital of the firm that is a beneficial option

- Budgets can often complicate equipment acquisition – business owners in Canada want to know them can circumvent a budget timelines or financing amount with an effective acquisition strategy

- Applying for a term or bank loan can takes weeks and months, lease equipment financing can often be approved in a matter of days based on the overall credit quality of your firm and the asset type

- Lease equipment financing is complimentary to your current secured lenders or bank operating facilities – they round out your ability to get additional assets and capital

The one thing you don’t want your acquisition needs to do is to restrict your overall cash flow and working capital position. That’s why we recommend you sit down with a trusted, credible, and experience advisor in lease equipment financing in order to assess your overall asset acquisition capabilities, as well as the benefits you can derive from utilizing this financing tool.

The reality is that every type of asset in Canada can be financed, so being for armed with that knowledge can greatly enhance your overall competitive financial position.

Clients often ask us at which point in the business cycle is they eligible for lease equipment financing. Some first are start ups, some are early stage, and in many cases they are mature companies with a growth and track record. The reality is that lease financing applies to all these types of firms.

Quite frankly the true challenge in leasing simply knows what cash flow benefits you can derive from the acquisition. It is important to structure a transaction that matches the appropriate rate, term and overall lease type that you are looking for. There are actually two major lease types, lease to own, called capital leases, and lease for use, more commonly called operating leases.

Investigate financing for equipment options. Work with a credible advisor. Decide which benefits works most for your firm, and structure a transaction that makes sense and maximizes your ability to grow revenues and profits.

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Inventory and Purchase Order Financing Solutions for Canadian Firms

For many Canadian business owners growing sales and profits is not always the biggest challenge, it’s locating business financing in Canada a can satisfy inventory and purchase order requirements from their customers.

When traditional financing doesn’t necessarily satisfy your firm’s ability maintain thee right levels of inventory, and satisfy those large new customer purchase orders and contracts than an inventory and P.O. Financing facility might just be the solution.
Clients we speak to like the concept but always ask – ‘How does this type of financing facility work?’ . We can use a basic example that reflects the power of this unique financing tool. Let’s assume you have an order, contract, purchase order, etc from a valued new or existing client. The challenge, mainly due to the size and or timing of the order, is of course how you purchase and maintain the level of inventory to satisfy those client needs.

When you use an inventory or purchase order financing facility your vendors or suppliers are paid directly by the inventory financier. Generally speaking up to 75% of the value of your order can be financed via a payment to the supplier. That 75% number is key, because in the example we are using I reflects that you probably have at lease a 25% gross margin on the sale of your products. Generally speaking at least that amount of margin is required to efficiently and properly complete an inventory or financing transaction. That is because the remaining 25% acts as both a buffer to the lender, as well as it allows some of your margin to be paid out as a financing fee of course , for the business risk and cost to finance your inventory/project .

Generally inventory finance lenders prefer to be paid as soon as you ship and create a receivable for your goods and services. That necessitates ensuring that you have a receivable financing facility set up with either you bank or a receivable financing/discounting firm.

What is the key benefit of such an inventory or p.o. financing facility? It is simply to remove a huge part of what finance people call the conversion cycle. If you don’t know the term we are very sure you know ‘the feeling ‘. It is the feeling of knowing that in a normal environment, if you were fully financed, that you would be waiting anywhere from 60-90 days, (sometimes more, sometimes less) for a dollar of your services to move from time of receipt of purchase order, your purchasing the inventory, your finishing the inventory, and then billing and waiting another 30-60 days for payment. The inventory finance facility helps to significantly lesson that amount of time as you can imagine.

That is why growth and the ability to carry inventory, (and receivables) are often the biggest challenges to Canadian business owners who are focusing on increased sales and profits.

Inventory and purchase order financing focuses on the transaction, and focuses less on the fundamentals of your company. Naturally the facility works best when you can validate that your firm has strong management, good profit potential in your orders, and the ability to successfully deliver and get paid to clients who are generally known or credit worthy. Financing for clients who sell to the ‘big box ‘stores are commonplace in inventory and P.O. Financing – think ‘Wal-Mart’.

Remember also that the financing facility we describe above delivers on working capital and cash flow, but is not a term loan per se, so no additional debt is on your balance sheet – you are simply monetizing your inventory, receivables, and purchase orders in order to complete our full ‘ conversion cycle’ of order  inventory  Receivables Cash .

When you can duplicate that process over and over and shorten the total time outstanding you have successfully utilized one of the most unique financing alternatives for Canadian business.

Speak to a trusted, credible and experienced advisor in this area if you have an inventory financing need. Ensure you understand timing, costs, how the facility works and whats required. You might find that it’s the perfect solution for growth and profits.

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Film Financing In Canada via Tax Credit Loans

Film financing in Canada (we’re including television and digital animation productions) has significantly benefited from the Canadian government’s very aggressive stance on increasingtax credits, which are non- repayable.

Unbelievably, almost 80% of U.S. productions that have gone outside of the U.S. to be produced have ended up in Canada. Under the right circumstances all these productions have been, or are eligible for a number of federal and provincial tax credits which can be monetized for immediate cash flow and working capital.

How do these tax credits affect the average independent, and in some cases major studio production owners. The reality is simply that the government is allowing owners and investors in film, television and digital animation productions to get a very significant (on average 40%)) guaranteed return on the production investment. This most assuredly allows content owners of such productions to minimize the overall risk that is associated with entertainment finance.

Naturally, when you combine these tax credits ( and your ability to finance them ) with owner equity , as well as distribution and international revenues you clearly have the winning potential for a success financing of your production in any of our aforementioned entertainment segments .

For larger productions that are associated with well known names in the industry financing tends to be available through in some cases Canadian chartered banks (limited though) as well as institutional Finance firms and hedge funds.

The irony of the whole tax credit scenario is that these credits actually drive what province in Canada a production might be filmed.We would venture to say that the overall cost of production varies greatly in Canada depending on which province is utilized, via labour and other geographical incentives.Example – A production might receive a greater tax credit grant treatment if it is filmed in Oakville Ontario as opposed to Metropolitan Toronto.We have often heard ‘follow the money’ – in our example we are following the (more favorable) tax credit!

Clearly your ability to finance your tax credit, either when filed, or prior to filing is potentially a major source of funding for your film, TV, or animation project.They key to success in financing these credits relates to your certification eligibility, the productions proper legal entity status, as well as they key issue surrounding maintenance of proper records and financial statements .

If you are financing your tax credit when it is filed that is normally done when principal photography is completed.

If you are considering financing a future film tax credit, or have the necessity to finance a production prior to filing your credit we recommend you work with a trusted, credible and experienced advisor in this area. Depending on the timing of your financing requirement, either prior to filing, or after you are probably eligible for a 40-80% advance on the total amount of your eligible claim. From start to finish you can expect that the financing will take 3-4 weeks, and the process is not unlike any other business financing application – namely proper back up and information related directly to your claim. Management credibility and experience certainly helps also, as well as having some trusted advisors who are deemed experts in this area.

Investigate finance of your tax credits , they can province valuable cash flow and working capital to both owner and investors, and significantly enhance the overall financial viability of your project in film, tv, and digital animation .The somewhat complicated world of film finance becomes decidedly less complicated when you generate immediate cash flow and working capital via these great government programmes.

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Financing Sr ed Credits – Access Working Capital via SR&ED Discounting

Canadian business owners and financial managers should consider financing sr Ed credits as a source of working capital and cash flow. It is a unique and alternative financing strategy that monetizes your Sr&Ed tax credit, and has no long term effects of adding debt to your balance sheet. All you are doing is simply ‘cash flowing’ or receiving your refund now instead of waiting for a potentially long time for your government refund cheque.

Business owners who file claims under the program already are keenly aware of the power of this great Canadian government program. Hundreds of Millions of dollars are refunding annually to your firm and your competitors – why not get a step ahead of the competition and turn that SR ED credit into immediate working capital.

Naturally the amount of your sred financing is related very directly to the total amount of your filed SR ED claim. Therefore it is in the best interests of every Canadian business owner who files under the program to maximize the size of their claim. They do that by working with a solid accountant or sred consultant who understands the true nature of the program. It is a misnomer that your research and development must be ‘successful ‘in the true sense of the word. The reality is that a proper sred claim is often increased simply by proving that you had significant trial and error in those business processes and research that you are documenting.

Anyway, you are aware of the program; you have filed a claim, or are in the process of filing a claim. What now? Consider financing the claim and turning your refund into immediate cash. Clients we work worthy with typically utilize funds in a SR ED financing to reduce payables, invest in additional research, buy equipment, or focus on investing in more direct marketing and sales The bottom line is that when you finance you SR&ED claim funds can be used for any worthwhile corporate purpose .
How does SR ED funding work? It’s really complimentary to any type of business financing you have ever done. You are not taking on debt; you are simply converting a receivable, i.e. your SR&ED credit, into cash. The best and most easy way to think of a sred financing is simply that you are factoring or discounting your claim. The funds will be repaid to the SR ED lender when you claim is approved by the government and your provincial government. (There is a Federal and Provincial component to each Sr&Ed claim)

You can access approximately 70% of the total claim you have filed. If the claim has already been approved by Ottawa and you are just waiting for the confirmed refund the 70% loan to value we just referred to can even be increased in many cases.
Even more sophisticated firms that finance their SR ED claims annually are not aware that under the right circumstances they can receive funds even prior to filing! That process is called a Sr&Ed accrual loan. That’s really staying one step ahead of the competition!

Financing SRED claims in Canada is a boutique financing. You accomplish it successfully when you work with a trusted, credible and experienced financing advisor re sred claims. The process involves a simply business financing application, copies of your sred filing, and miscellaneous business back up material to substantiate the sred loan. The total focus of the loan relies heavily on the actual claim itself, not the overall credit worthiness of your claim, as some might believe.

If you are filing sred you can stay ahead of the competition by considering of financing your claim. It’s a simple process that can be completed in a couple of weeks with your full co operation of back up info, etc. Your sred claim is already not repayable to the government, as it’s a grant, so consider supercharging that program by immediately monetizing your claim in valuable cash flow and working capital.

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