Questions on Franchise Financing Loans
You are quite taken with the idea of starting a franchise. You’ve done extensive research, hired a franchise lawyer and already have a business plan in place. The next thing on your list is funding the franchise. Many Canadian franchisees often discover that franchise financing can be as testing as the steps that precede it.
You should, of course, understand how the Canadian franchise sector is regulated and the kinds of protection and disclosure clauses that exist for both franchisee and franchisor. In Ontario, these rights are listed under the ‘Arthur Wishart Act’ and there are similar laws in place in other Canadian provinces. It would be a wise move to look at the appropriate legislation in detail with the assistance of your franchise lawyer.
You may have several queries regarding Canadian franchise finance loans, some of which are addressed below:
Q: Is it possible to buy a franchise venture without formulating a business plan?
A: It is not advisable to enter into any business venture without a business plan. Even if you are not involved personally in preparing it, it would be sensible to participate in its input and processing. This can have the effect of raising your awareness on practical and financial issues connected to your proposed franchise.
Q: Are appraisals necessary?
A: Yes, but the cost of the appraisal is certainly worth it as it boosts the lender’s confidence in the project and also reduces your calculated financial commitment to the franchise.
Q: What would be the typical interest on a Canadian franchise finance loan?
A: Currently interest rates are in the range of 5% to 6%, which is considered excellent for start-ups. Of course, your franchisor’s brand reputation and depth of market penetration will also count.
Q: Where can you avail these loans and interest rates?
A: These are available through the CSBF or BIL loan, also sometimes referred to as the Canadian Government Small Business Loan. Most franchise businesses are financed through this avenue. Of course, you may want to consult a reliable and trustworthy advisor experienced in franchise finance who will arrange this financing for your franchise venture.
Q: Is the CSBF loan the sole method available for franchise finance?
A: No, you have other options such as equipment finance to acquire fixed assets for the franchise, cash term loans and of course, your own money that you can invest in the franchise. All business ventures are typically financed by a component of debt or loan, along with the owner’s contribution of equity.
Q: Is it possible to obtain a franchise loan without providing a personal guarantee?
A: No. However, the CSBF loan needs a personal guarantee of just 25%.
Q: Can a franchise business be financed without a down payment?
A: No, definitely not. Whether you a starting a small restaurant franchise or a large manufacturing unit, all Canadian lenders will check out the owner’s financial contribution in the venture. As a franchisee, you have to strike a balance on how much to invest in the franchise.
Remember to cover all legal aspects of the financing process with a franchise lawyer as these areas can be particularly complex for first timers in the franchise field. Ensure that you research all available finance alternatives exhaustively and work towards minimizing your financial risks.