Franchise Funding: Preparing to Finance Your Franchise

So, you’ve identified the golden franchise opportunity that suits your skill set and needs. What’s next? Funding.

Two significant expenses to consider are the initial franchise fee and ongoing royalties.

The franchise fee is the nonrefundable, one-time price to operate a franchise using the franchisor’s model. You usually have the choice to pay it in one lump sum or installments and typically cost tens of thousands of dollars.

Royalties are ongoing franchise fees to continue operation of a franchise business. On average, they range from five to six percent of gross revenue. However, that percentage varies depending on the franchisor.

Don’t Freak Out Just Yet; It’s Going to Be Okay

Finance. The word itself can be daunting. But before you get overwhelmed, let us ease those feelings of stress, one step at a time.

Take a step back and breathe while we help you prepare for the process of financing your franchise; it’s not as bad as you think, once you have all of your documents in order. So, let’s start there.

Getting Organized

Many lenders, including franchisors, will ask you detailed questions about your personal finances, credit history and track record. That means organization is key to smoothing the overall funding process.

Gather the following documents to create a list of assets and liabilities:

• Income Statements
• Bank Statements
• Recurring Bills
• Debt Statements
• Credit Reports
• Credit References

Making Sense of It All

Use these documents to create a personal financial statement, including a balance sheet that breaks down all of your assets and liabilities.

A balance sheet lists your current bills, a list of charges, auto loans, mortgage statements and more. It also helps when calculating your net worth. A personal financial statement outlines your financial position and typically includes general information like your name and address, as well as your net worth.

Lenders want to know they can trust you to pay back the loan. A personal financial statement and balance sheet will help them decipher if you’re worth the risk. Hopefully, these documents will prove you are.

But Wait, There’s More

Lenders also want to know which franchise you chose and how you intend on working with the franchisor. That means providing a thorough business plan. Surprisingly, your business plan can make or break your chances of getting a franchise loan.

Your business plan should include:

• Business Overview
• Accurate Proforma
• Profit Projections
• Cost Analysis
• Working Capital Estimates
• Detailed Marketing Plan

While most franchisors provide a comprehensive business plan, it’s important to show you have your own plans that support your success.

As a Rule of Thumb…

• When it comes to franchise funding, always start by asking your franchisor. If you’ve already met the investment requirements, franchisors are typically happy to bend over backward to assist with financing because helping you start your business helps them expand theirs.
• Never invest more than 75 percent of your cash reserves. For example, if you have $10,000, only invest $7,500 of your own money.
• Be prepared to explain all discrepancies. Lenders will want to know everything about your financial history, including intimate details about late or missed credit payments. They may also ask about your work history, how long you lived in a single location, question your reasoning for debt and more.
• It may seem silly, but neatness matters. Try to type out your credit and loan applications instead of filling them in with a pen.
• This may seem obvious, but keep debt and expenses to a minimum. Many business owners take on too much debt and forget their cash flow will be used to pay off that sum.
• Consider buying used or leased equipment to keep start-up costs low.

Pro Tip:

Remember, lenders are known to favor brand-name businesses because they have long track records of success. Keep in mind that lesser-known franchises with fewer locations are not as desirable. But that doesn’t mean they’re outright unwilling to fund a lesser-known franchise. You just have to provide more support, plans and documents to prove the franchise’s potential.

Once you’ve completed the checklist of tasks we’ve covered in this blog, it’s time to start thinking about where to find the actual funding for your franchise. Our Learning Center has you covered with an in-depth guide to Financing Your Franchise and everything you need to know about franchising.