Financing the Purchase of a Franchise

When you decide to establish a franchise business it gives you the advantage of working for yourselves and simultaneously having access to the resources and the knowledge of the franchisor. Adequate planning and hard work will give you the satisfaction of watching your franchise expand and grow over a period of time.

Establishing a franchise may sound easy but you need to arrange for a huge amount of money. The franchisor will request an initial amount of money, set funds aside for royalty fees and make arrangements to have adequate financial support to handle the requirements of infrastructure.

You can find a number of sources which can be tapped for the funds you need. However, before you begin work on financing the purchase of a franchise you must be prepared with all the information needed to obtain the finances. What is the preparatory work you need to do before approaching the sources of the financing?

Have A Business Plan

In order to prepare a business plan, you will benefit by hiring the services of a professional. The lender you have decided to approach would be looking to get a clear idea about how you intend to utilize the money you borrow along with the revenue streams you will generate to return the money back. The professional you hire to prepare the business plan should be able to describe the product or services you are planning to sell and also give information about your target market. On your part, you must be prepared to explain all the details included in the business plan including any financial data.

Your Credit Score

If you have appropriate credit scores you will definitely find it beneficial but you shouldn’t be concerned if you do not meet the criteria. If you have a satisfactory explanation for your credit scores and can provide it in an appropriate manner.

Proof Of Equity

Lending institutions will not be willing to extend you 100% of the finance you need. It is therefore essential for you to be able to demonstrate your ability to make a contribution of at least 25% or more of the total funds you have requested.

The Options For Financing The Purchase Of a Franchise

Approaching traditional sources for financing the purchase of a franchise is the most economical option you should be looking out for. Approaching a bank or a credit union will mean you have to be patient until your papers are processed. However, you can also be certain that the rates of interest charged for the financing will be the lowest when you compare them with other sources.

You must also take into account the record of the franchisor you have selected because it has an important role to play in helping the bank to decide whether or not the financing should be extended. If you are dealing with a franchisor who is well-established and has a popular brand your chances of receiving an approval for the financing become easier. Banks will also be considering the number of franchisees of the franchisor who are highly successful before leaving you an approval for the financing.

You can also obtain the financing you need for the purchase of a franchise from small business administration loans because it can be a good alternative. SBA is a government institution which does not make loans by itself but can forward guarantees for loans made by other lending institutions. An SBA loan would be a good option for entrepreneurs that are planning to establish their first franchise because if you meet the criteria set forth by SBA you can receive 75% of the financing you need for the purchase of a franchise.

The franchisor can also provide you some help with the financing if you are hard-pressed for the same. You can decide to borrow money from your relatives and family or even deep into your 401(k) if it is substantial and you are able to overcome the restrictions imposed by government rules. However, you are advised to remember there is a business risk involved even in franchises and therefore you should consider all options carefully before you commence business with the franchise.