After the initial excitement of learning about the multitude of franchise opportunities out there, it’s important to seriously consider all of the financial details so that you can sign on that dotted line with confidence. Among the myriad of questions to consider, how you’re going to finance your franchise is probably at the top of the list. There are many financing options for franchisees who want to take out a loan for their business, from borrowing from family to getting a loan from a not-for-profit organization, to government loan programs. Here, Franchise Canada takes a look at some of the options out there that are available to prospective franchises, beyond borrowing from the bank.
All in the Family
For many people, securing a loan from a family member is one of the first options they think of. It just makes sense: Both you and that family member are invested in your future, and you can work together to dictate the terms of the loan. Sabrina Callaway, a litigator with the firm Sotos LLP, agrees that many people do seek funding from friends and family. “Especially the millennials, or those who don’t have assets to support traditional financing,” she says. It’s hard for these younger would-be business owners to secure a loan, since it’s less likely that they have collateral. “There’s been a trend lately in millennials purchasing franchises. A lot of millennials are fresh out of college. They are burdened with debt and don’t necessarily have the assets to back the franchise and get it off the ground,” Callaway explains.
While borrowing from family members is a popular option, Callaway cautions that with such an arrangement, there are some vital things a franchisee needs to be aware of. “What we find as lawyers is that it’s quite easy to accept money from people, but eventually they’re going to want it back,” she says. “It’s important to have some kind of loan agreement or promissory note that sets out the terms of how you’re going to pay this back.” This note should include the payment terms along with the defined payment period. Franchisees should also think very carefully about the implications of the loan, and about whether or not their repayment plan is realistic before moving forward.
Callaway also notes that franchisees have a number of options, especially when joining a larger system. “If they can’t get financing through the traditional routes, they should see what the franchisor has to offer. Occasionally franchisors will give loans to the franchisees, or it might come from someone else in the system, like a shareholder.” If this is the situation, sometimes the franchisor might perform a credit check on the potential franchisee. She also says that many franchisors also have connections with some of the banks, which may mean that a prospective franchisee can have a different agreement set up with a favourable interest rate.
One final piece of advice from Callaway is to consider how much money you’ll actually need. “The franchise disclosure document will often list start-up costs, but that doesn’t give insight into how much cash flow you’ll need or the burn rate of the business. It would be a good idea in the 14-day period between disclosure and the signing of the franchise agreement to consult with a business consultant who will set up a business plan,” she advises. “That business plan will show you what you need to run the business profitably and what you can expect in terms of revenue going forward.” Armed with that knowledge, the franchisee can then make informed decisions about loans.
Organizations Nurturing Entrepreneurship
Not-for-profit organizations are also an excellent source of loans for potential franchisees.
In particular, Futurpreneur Canada is a national not-for-profit that works with 18 to 39-year-olds. They provide business resources, such as start-up resources, financing, and mentorship for entrepreneurs all over the country. “We provide a ton of online resources free of charge that include business startup resources that are from all differ sectors and specialties – not just from Futurpreneur but from other partners as well,” explains Scott Bowman Senior director of Futurpreneur in Ontario.
“Beyond the resources, we provide up to $45,000 in a no-collateral, no-equity loan,” Bowman explains. The first $15,000 of this loan comes from Futurpreneur’s own loan portfolio. Then, you’re automatically eligible to be considered for up to another $30,000 through the Business Development Centre (BCD). “It’s based on the strength of the business plan,” he explains.
A big benefit of the Futurpreneur program, for young people in particular, is the unsecured loan. “Maybe they’re just coming out of school and they have a student loan, but they still have this big dream of owning a business,” says Bowman. He goes on to say that while it is unsecured lending, they do perform a credit check to ensure the applicant has reasonably good credit.
Bowman says that he’s seen a variety of prospective franchisees come through the door of the Futurpreneur program, including from Canadian Franchise Association (CFA) members Pita Pit and The Ten Spot. “Most people that come to us pay the franchise fee with our financing,” he explains. “Owning a franchise is still owning a business: You still have the same struggles, you just might have more support.”
There are a number of useful franchising resources on the Futurpreneur website. Bowman recommends that you perform thorough research on the franchise that you’re interested in. “Talk to some of the franchisees and do research on what the business’s track record is and its reputation,” he says. “Do they [the franchisor] provide you with financial information that you can take to an accountant or another funder?” He also suggests performing a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis, and understanding your competition. “Really doing your due diligence is really important for the potential franchisee,” he states.
While Futurpreneur’s business plan writer and cash flow template aren’t specific to only the franchise model, they are extremely helpful for planning out exactly how much money you’ll need. “If you don’t understand the costs beyond the franchise fee it will be tougher for you to get funding from others,” explains Bowman. “You might be able to get funding from Futurpreneur that’s great, but you’re going to need more money for capital expenses, etc.”
The Government of Canada offers a number of resources available to those looking to finance a new business. A great place to start is www.canada.ca/en/services/business/grants. Here, you’ll find a comprehensive list of all of the government financing programs, public funds and grants and non-governmental community-based and private sector organizations that provide funding. You can also learn about important topics such as loans and capital investments, wage subsidies, plus resources for managing your finances and more.
The Canada Small Business Financing program provides loans for new and existing businesses by partnering with financial institutions and sharing in the risk. The loans can be up to $1,000,000, depending on the arrangement between the borrower and the lender, and a maximum of $350,000 of that can be used towards the purchase and improvement of equipment and property. There are also other restrictions on what the money can be used for; it cannot be used for certain expenses such as inventory or your franchise fee.
For these small business loans, there is a small registration fee, which comes out to two per cent of the entire loan. The interest rate depends on the provider, and there may be lender fees as well. You can secure your small business loan at most financial institutions as many have chosen to participate in the program.
By Karen Stevens