You are investing in a franchise? Congratulations! Any thoughts on how you’re going to find the finances to grow this new business? Stupid question – the worry lines on your forehead say it all. Investing in a franchise may bring several advantages, and give you a head start on many counts; but sadly, when it comes to arranging the funding, you’re faced with the same uphill task as with any other form of business.
Finding money for a franchise involves arranging resources at different levels and times. At the outset, you may have to pay a fee to the franchiser, which secures you the right to use their brand, sell their products in a certain territory and so on. The size of the franchise fee can vary significantly, and is usually directly proportional to the strength of the franchiser brand.
Try to negotiate a staggered payment with the franchiser, mapping revenue inflows. Once you’ve handed over this check, it’s time to worry about another one. If you own the business premises from where you intend to operate the franchise, good for you! For those less fortunate, it’s time to find a suitable location and the money for making advance rental or security deposit payments. Not to mention, a broker fee. And we haven’t even talked about doing the interiors yet!
Costs of equipment and working capital make up a large part of funding a franchise. While there’s no getting around the expenditure, securing favorable terms of credit from suppliers can go a long way in easing the cash flow. Make sure you evaluate at least a few vendors to ensure that you’re not being ripped off. Also, look for opportunities to buy in bulk at discounted prices. Leasing, rather than buying equipment can work in some cases, but not all. “Negotiating Business Equipment Leases” by Richard M. Contino, available at www.amazon.com under the Professional and Technical books category can give you a better perspective.
The strategies we discussed above will help some, but funding a franchise takes a lot more. Unless you already have the resources to support the venture for a year or two, there’s no alternative but to borrow. If you’re going to take a bank loan, be prepared to hand over a copy of a detailed business plan, along with plenty of other documents. Also, visit our Finance section to find out more on the procedures associated with a loan application. Your chances of securing the loan will depend enormously on the collateral you can provide, your previous credit history and your personal and business reputation. In any event, you will have to fork out about 25% of the requirement from your own resources.
If you’ve decided to take the equity route for funding a franchise, be prepared to answer some stiff questions from prospective investors. There’s more on this in another article on Equity Financing on this site.
A piece of advice – in general, you will find that investing in a franchise becomes easier when you seek the help of the franchiser. A well established franchiser brand will usually have a system in place to help you along – this may include tie-ups with financing institutions. They will also help you build a business plan and financial forecasting model, based on the actual experiences of other franchisees, so you don’t have to plod your way through all by yourself. And last, but by no means least, projecting the strength of an established brand to prospective financiers will only help any quest for investing in a franchise.