An Informational Guide to Franchise Financing
Starting a business is often one of the most fulfilling endeavors that you can pursue. And, there’s a strong chance that it can be highly lucrative if you manage it properly.
But, you don’t always have to come up with an original idea in order to become a business owner. Starting a franchise is a viable option that many entrepreneurs choose due to its stability and convenience.
Not everybody understands what they should about franchise financing, though.
Let’s dive into what you need to keep in mind.
Understand the Costs You Will Incur
As you might guess, you’ll need to have a strong understanding of the costs associated with starting a franchise. Interestingly, many entrepreneurs are unaware of the vast amount of expenses associated with owning and operating a franchise.
For example, there are costs associated with zoning, required software, and permits. These will highly vary depending on what type of franchise you wish to open.
In general, though, there are a few that are relatively consistent among different businesses. These include:
- Inventory costs
- Property leasing/ownership
- Working capital
So, it is in your best interest to thoroughly research what type of expenses are associated with your preferred franchise. Otherwise, you might encounter difficulty in the future when looking for a lender to work with.
Additionally, having an understanding of these costs will make it far more likely that your business plan will succeed.
Calculate How Much Money You Will Need
Although it’s imperative that you are aware of the necessary expenses, knowing this information won’t do much on its own. Instead, you will need to calculate exactly how much money you will require in order to open and sustain your franchise.
It should come as no surprise that failure to do so can result in significant setbacks. For example, let’s assume that you expect your cleaning franchise to cost $500,000 to open and operate within the first three months.
But, you didn’t review the calculations that you made, and the actual cost is closer to $800,000. You could easily find yourself in a situation where you are managing a struggling franchise while also being responsible for paying this $500,000 back to your lender.
This is a scenario that you should avoid at all costs. You should remember two principles before securing funding:
- It’s better to assume that you will require funding on the higher end of your calculated range
- Your business may not perform as well as your projections within the first three months of opening
It’s often better to borrow more money than you anticipate in order to ensure that you have the necessary capital to run your business efficiently.
Improve Your Chances as a Candidate
As you might guess, lenders will go to great lengths to vet potential borrowers since you’re dealing with such a large sum of money. In some cases, securing financing from a particular lender is a highly competitive process.
In general, lenders often consider factors like your credit rating, your experience owning a business, any collateral you are able to offer, and your liquid assets. So, it’s in your best interest to do what you can in order to improve your chances as a potential borrower.
In context, this means providing sufficient evidence of your business experience. If you have collateral that you are willing to offer, this can often help sway their decision in your favor.
It’s also possible for you to have somebody cosign a loan with you. This is done to help mitigate the risk that the lender experiences when offering to finance someone who is a suboptimal candidate.
If you choose to go this route, it’s essential that you only cosign a loan with someone you trust. Additionally, you should be aware that managing such a large sum of money with another person has the potential to erode the relationship.
Think twice before doing so with friends or family members. It’s often best to do so with a business associate or partner, especially an experienced individual who can offer business advice.
What to Look for in a Lender
It should come as no surprise that one of the primary factors you should keep an eye out for is the total amount of money that they are willing to give you. After all, it can be notably difficult to start a franchise if you have to work with multiple lenders to secure financing.
But, you also need to thoroughly read the terms of the loan. This will give you vital information such as their interest rate, loan repayment term, and other circumstances that you need to know about.
Additionally, it’s worth considering the speed at which you are able to secure financing. Some lenders take a notable amount of time in order to approve the application and allocate the money.
This is especially true if you are applying to borrow hundreds of thousands of dollars.
Since you will need to finance a franchise well before you open it, it’s imperative that you have your financing secured in advance. Otherwise, you could find yourself struggling to make the necessary purchases before your grand opening, something that could drastically impact your projected performance.
Managing Your Franchise Financing Can Seem Difficult
But, it’s not quite as hard as you might anticipate. The above information will ensure that everything goes as smoothly as possible regarding your franchise financing. From here, you can get started pursuing your business goals and hit performance metrics like never before.
Want to learn more about what Alto Capital has to offer? Feel free to reach out to us today and see how we can help.