When it comes to financing a franchise, you have various options—drawing assets from your retirement account, SBA loans, financing through the franchisor, home equity loans or second mortgages, borrowing from family or friends, or utilizing your own resources. If you decide to take out a loan or seek outside finance, there are several actions you may take to improve your chances of success.
When selecting how to finance your franchise, consider the following points:
- Find out how much financing will cost in total. This covers interest rates, financing fees, the first six months of operational costs, and other elements.
- Determine what personal assets you are willing to put at risk as collateral.
- Make sure you understand the default terms and conditions for the financing alternatives you're considering.
- Understand how the total and monthly payback expenses affect your present and anticipated cash flow.
- Understand the debt's amortization plan, including how long you will have to pay it back and how your monthly payments or interest rates will fluctuate over time.
To become the ideal borrower, you must concentrate on the five C's: capital, credit, capacity, character, and collateral. This equates to available funds for a down payment, a solid credit history, adequate cash flow to meet debt repayment, past expertise in the business in which your franchise operates, and personal property to guarantee your loan. While not possessing all of these will not exclude you from receiving finance, the more boxes you check for your prospective lender, the more likely you will acquire the necessary funds.
Whatever method you choose to fund your franchise, there are five things you can do to boost your chances of approval.
1. Know everything there is to know about the franchise you want to acquire. Do your homework and be prepared.
2. With your lawyer or accountant, go over the franchisor's Franchise Disclosure Document, or FDD. The FDD is a goldmine of knowledge and the most significant document you'll read during the discovery phase.
3. Develop a business plan. Always bear in mind that the business may not scale up as rapidly as you would want, which implies that your prospective revenue stream may take longer to build than you anticipated.
4. Improve your credit score. A strong credit score is one of numerous elements that will determine your interest rate, payment terms, and loan amount.
5. Prepare your collateral funds. Most will want a 10 to 20% down payment to demonstrate that you have a financial stake in the financial success of your potential franchise.
Are you interested in learning more about financing your franchise opportunity? Please schedule a call here.
