The cost to buy a franchise varies greatly. While you could get into a franchise for as little as $10,000, others can cost you hundreds of thousands of dollars, or even upwards of $1 million, depending on the type of franchise you wish to get into.
Considering these hefty costs, you may not have enough liquid cash in your bank account to cover a franchise purchase. But luckily, there are plenty of financial products you may be able to tap into to get the funds needed to become a franchisee.
Ways To Fund A Franchise In Canada
There are numerous sources you can use to fund your franchise in Canada. Depending on your situation, one option may offer more benefits than the other.
Financing From The Franchisor
The first place you’ll probably receive financing from is your franchisor; this is the company or individual that you’re purchasing the rights to use their branding from. Every franchise and franchisor is different and therefore the loans they provide vary greatly. Here are some of the types of business financing you can expect to receive from your franchisor.
- Many franchisors won’t actually lend you a principal but instead will finance all your start-up costs and then ask for interest on all your sales.
- Some will only ask for payment after your franchise has been open and running for a year.
- Others finance everything for you and then ask for a large payment after 5 to 10 years.
Do Franchisors Cover Equipment Costs?
Franchisors often cover the costs of the equipment and other necessary items like signs and fixtures. These items are requirements for the proper running of their company and therefore they’ll want you to make the appropriate choices.
They often also have deals set up with leasing companies so that new franchise owners can get the equipment they need at a discount price. This is important as the equipment is usually anywhere between 25 and 75 percent of the total start-up cost.
Equipment Loan
If the business you’re getting into requires lots of expensive equipment, you can cover the cost of acquiring everything you need with an equipment loan. This type of loan is relatively easy to get approved for because your equipment collateralizes the loan, in which case the lender has an asset of value to recoup if you default.
HELOC
If you own a home, you may have enough equity built up to fund your franchise purchase. Equity refers to the difference between what your home is currently worth and the mortgage amount you still owe.
One way to access your home’s equity is through a home equity loan or HELOC. With this type of financing, you’ll be given access to a certain amount of money within a specific time period, and can withdraw and repay amounts within this time as often as you like.
A HELOC is a revolving type of credit, just like a credit card. You only pay interest on the amount you withdraw. Rates and repayment schedules are typically affordable since your home collateralizes the HELOC.
Business Loan From The Bank
A common way to finance a franchise purchase is through a traditional bank loan. Like a typical loan, your lender will provide you with a lump sum of money that you can use to buy your franchise, which you’ll need to repay — plus interest and fees — in installment payments over a specified period of time.
To get approved for a business loan from your bank, you’ll need to have a business plan prepared. Your bank will want to make sure your business will be a viable one that is likely to be profitable. You’ll also need to show that you know what you’re doing and that you’ve done your homework to ensure you’re borrowing only what you need to start your business.
Your credit score will likely be checked to make sure you’re a responsible borrower.
Alternative Business Lenders
If your credit score is a bit on the lower side, you may have better luck securing a loan to buy a franchise from an alternative online lender. Unlike conventional lenders, alternative lenders don’t have very stringent lending requirements.
Some lenders in this sphere may accept low credit, while others may not conduct a credit check at all. Instead, alternative lenders will place more weight on other factors to verify your ability to carry a loan, such as your assets and employment.
Crowdfunding
Another option available if you don’t have good credit is crowdfunding, which involves raising money from a variety of people, typically through the internet. You can promote your own crowdfunding page or get some help from different crowdfunding organizations that cater specifically to people in your shoes who are looking for funding to get their businesses off the ground.
What Are Lenders Looking for?
Lenders look at a number of factors when deciding if they should lend you money. This may include stability, income, track record and business plan. These are some components that can give a lender the information they need to make a decision about your creditworthiness.
Stability
Lenders like to see that there is a lot of stability in your life, whether it’s personal, financial, or professional. This stability shows a lender that you are capable of finishing a project and following through on your decisions. Being employed at the same company for several years and living within your means are all things that lenders are looking for.
Income
Can you manage your own personal finances? If you can’t, a lender will see you as a risk and think twice about lending you more money to open a business.
Track Record
This is where a lender will contact the credit bureaus and ask for a copy of your credit report. They want to know if you’ve had past trouble with loans and debt, past financial issues are a clear indicator for future financial issues. While this might not always be the case, lenders need to weigh the advantages against the disadvantages.
Business Plan
A comprehensive business plan that lists all the specifics about how your franchise will be run and how long it will take to turn a profit can be the difference between rejection and being accepted. Your completed business plan should include:
- A study of the business you’re entering
- Cost analyses
- Income, debt, and profit projections
- Working capital estimates
- Marketing or advertising plan
How To Fund And Start A Successful Franchise
If you want to become a business owner and have narrowed down your options to a franchise, take the following steps to fund and start your business:
Step 1: Fill Out An Application
The franchisor will require that you complete an application to become a franchisee to make sure you make a good fit for the company. They will then send you their franchise disclosure documents that provide you with more details about the organization’s operations.
Step 2: Attend A Presentation
Franchisors often invite prospective franchisees to their headquarters to meet in person. This is a chance for you to ask questions and tour the facilities so you can decide for sure whether or not it’s a good match.
Step 3: Get Information From Other Franchisees
Speaking with other franchise owners is an excellent way to get the real scoop about what it’s like to be a franchisee with a particular company. You can find out if they get the right support, what the work is like, and how much you can expect to make as an owner. A list of owners should be included with the franchise disclosure documents.
Step 4: Review The Company In Detail
Like any other type of business, you’ll want to make sure you have all the details pertaining to a business plan, market analysis, anticipated revenues going forward, and so on. Doing your due diligence before you become a franchise owner is crucial.
Step 5: Get Funding
The franchisor may help you find the right lender to assist with financing the purchase of your franchise, as well as all start-up costs.
Step 6: Sign The Contract.
Make sure you’ve reviewed the franchise agreement and have had a lawyer look over it as well before signing it.
Step 7: Get Insurance And All Necessary Permits.
You must ensure that you adhere to all municipal and provincial requirements, if applicable, related to your business. This may require that you get all the necessary licensing, permits, and insurance.
Advantages Of A Franchise
There are plenty of perks of buying a franchise as opposed to starting a business on your own:
Brand Recognition
Buying a franchise typically means you’re buying an established name along with it. People are already familiar with the franchise brand, which makes it easier to get clients who have already come to trust the company.
Established Supply Chain
The franchise likely already has a network of vendors that they work with and have vetted, which you can also use for your business without having to find them yourself.
Assistance With Start-Up And Ongoing Support
Starting a business from the ground up is one of the most difficult aspects of becoming an entrepreneur. But with a franchise, you’ll get all the help you need navigating the process of starting your operation, both from the onset and as your business starts to grow. At any point, you’ll always have the backing of your franchise in all aspects of the business.
Turnkey Operation
Generally speaking, franchisors do a lot of heavy lifting for you so you can just step in and start reaping the rewards of business ownership. More specifically, franchisors will find the right location, buy or lease the building, stock inventory, hire employees, and provide training so you know exactly what to do to ensure a successful business.
Get Financing More Easily
Since franchises already have a history of success, securing a loan is easier compared to getting financing to start a business with no historical data available. Lenders often view franchises as less risky and may be more willing to extend a loan as a result.
Disadvantages Of A Franchise
Along with the benefits of buying a franchise are some drawbacks that you should consider:
Formal Contract
When you buy a franchise, you’re entering into a formal agreement with the franchisor for a certain time period. During that time, you’ll be bound to the terms, and the franchisor may choose not to renew the agreement once the term ends.
Limited Control
You won’t have as much control over your business as a franchisee compared to starting your own business with no ties to a franchise. Franchisors dictate how franchises are operated and place restrictions on things such as location, products sold, vendors, marketing, promotions, and decor.
Franchise Fees
Depending on the franchise you buy, the initial cost can be substantial, especially if you’re buying a popular brand that brings in hefty profits for franchisees.
Ongoing Costs
In addition to the franchise fee, there are also ongoing costs that you’ll need to pay. Granted, these fees cover quite a bit, including support, training, marketing, and other tasks. However, these regular costs will inevitably eat into your profits.
Complex Exit Strategy
Getting out of the business can be challenging, especially if your contract includes stringent terms and conditions that may bind you to remain a franchisee for a specific period of time.
Funding A Franchise FAQs
How much does it cost to start your own franchise?
What’s the failure rate of a franchise?
How much are the starting costs of a franchise?
Bottom Line
There are several financing options available to most new business owners. If this is your first time starting a business and you have no other experience in the industry, you might have trouble being approved by more traditional lenders. In this case, you may want to consider a private lender as they often have more lax requirements. Just make sure that any additional financial assistance you receive doesn’t violate any of your franchise’s rules.
