You’ve read the literature, done your due diligence, considered the statistics on success, and know a franchise is the way you want to get into business.
But before you sign on the dotted line, answer this question first: Where will you get the money to finance the franchise, royalty fees, inventory and working capital?
The first thing you want to do before approaching any lender is determine what your net worth is. To do this, use a personal balance sheet to list both your assets (what you own) and liabilities (what you owe). Under assets, list all your holdings – cash on hand, chequing accounts, savings accounts, real estate (current market value), automobiles (whether paid off or not), bonds, securities, insurance cash values and other assets – then total them up.
The second part of the balance sheet is liabilities. Follow the same steps. List your current bills, all your charges, your home loan, auto loans, finance company loans and so on. Subtract your liabilities from your assets.
Once you’ve worked up this sheet, take a good look at your credit rating. There are three common ingredients that all potential lenders look for in a credit rating: stability, income and
Most lenders are interested in how long you’ve been at a certain job or lived in the same location, and whether you have a record of finishing what you start. If your past record doesn’t show a history of stability, then be prepared with good explanations. Not only is the amount of income you earn important but so is your ability to live within that income.
Most lending institutions look at your income and the way you live within that income for one very good reason. If you can’t manage personal finances, the odds against you being able to manage your business finances are very good.
The third element lenders look for is your track record – how successful you’ve been in paying off past obligations. If you have a record of delinquent payments, repossessions and so on, you should get these squared away before asking for a loan.
Most lenders will contact a credit bureau to look at your credit file. We suggest you do the same thing before you try to borrow. Once you have this tool, you should correct any wrong information or at least make sure your side of the story is on record.
Tips to Consider
There are infinite sources of financing available to help you launch the franchise of your dreams. However, operating a franchise with no reserves and blinding yourself to unexpected business problems can lead to disaster. A good rule to remember: Never invest more than 75% of your cash reserves. If you have R40 000, invest R30 000. If you have R100 000, invest R75 000.
More important, remember that the price of a franchise doesn’t always reflect the actual cost of the business itself. Additional costs can include down payments on the land, building, equipment, fixtures and signs, and can cover inventory, leasehold improvements, training, opening promotional costs, administrative costs and even sales commissions.
Source: The Small Business Encyclopedia, Start Your Own Business, Entrepreneur magazine and Entrepreneur’s StartUps magazine. © Entrepreneur Media Inc. All rights reserved.
15 fast franchise financing tips
- Talk to your franchisor before searching for outside financing; get approved or pre-qualified.
- The most common source of start-up capital is friends and family. Use them.
- Seek out lenders that understand not just small business but franchising as well.
- Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.
- Neatness counts. Fill out your credit and loan applications clearly. Typed is better.
- Don’t weigh down your loan application with attached documents.
- Don’t exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.
- If you lack liquidity, find a partner with money.
- Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.
- Keep debts and expenses to a minimum. Many business owners take on too much debt, forgeting that cash flow must pay that debt.
- Consider buying used equipment, furniture, vehicles, etc.
- Let your fingers do the walking on the Internet before wasting time, energy, gas and phone calls. You’ll find useful information. Some sites even allow you to file loan applications online.
- Don’t overlook angel investors and venture capitalists.
- Avoid dipping into your retirement money or your kids’ college funds. Any start-up – even a franchise – is a risk.
- Don’t give up!