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Financial Services for Franchise Business Starters
One of the major obstacles in starting a franchise is financing because many lenders are reluctant to fund startup franchisees. As a result, entrepreneurs usually seek the services of a financial advisor to assess their qualifications and determine if they are average, strong or unique. They then formulate a strategy and presentation to the source of the financing. This is even more important as studies show that 84% of small business and franchise clients failed loan processing based on their initial presentation. This proves the importance of the franchise finance specialist who assesses your proposal, conduct initial feasibility studies, and evaluate the proposed location and the credibility of the franchisor.
Choosing the Right type of Financing
It is important that entrepreneurs take consideration of the type of financing they will need to set up the franchise. The type, source and condition of the loan they seek will have a major effect on the success of their franchise. Contracts must state clearly the period and rate of repayment along with the repercussions for default on payment. The type of financing must also fit your goals and lifestyle. Investors must seek the advice of the franchisor as to the best source of financing and type of business. In general, the criteria to attain financing fall under the 4Cs:
Types of Financing
There are various types of financing. Some of these include:
Financial Services for Franchise Business Starters
One of the major obstacles in starting a franchise is financing because many lenders are reluctant to fund startup franchisees. As a result, entrepreneurs usually seek the services of a financial advisor to assess their qualifications and determine if they are average, strong or unique. They then formulate a strategy and presentation to the source of the financing. This is even more important as studies show that 84% of small business and franchise clients failed loan processing based on their initial presentation. This proves the importance of the franchise finance specialist who assesses your proposal, conduct initial feasibility studies, and evaluate the proposed location and the credibility of the franchisor.
Choosing the Right type of Financing
It is important that entrepreneurs take consideration of the type of financing they will need to set up the franchise. The type, source and condition of the loan they seek will have a major effect on the success of their franchise. Contracts must state clearly the period and rate of repayment along with the repercussions for default on payment. The type of financing must also fit your goals and lifestyle. Investors must seek the advice of the franchisor as to the best source of financing and type of business. In general, the criteria to attain financing fall under the 4Cs:
- Cash: Individuals must have the net worth of the amount of cash they wish to borrow before approaching a financial institution.
- Credit: They must have a good credit record to validate your honesty when borrowing money and their commitment to repayment.
- Collateral: Most lenders prefer completely secured loans as personal assets provide security for these loans.
- Character: This refers to the general public perception of the individual. Most loan institutions require a letter of recommendation from a prominent member of the community.
Types of Financing
There are various types of financing. Some of these include:
- Self-Financing: utilizing money from your own savings. Most experts warn against borrowing money from friends and family, as this is a potential flash point in case negative situations arise.
- Franchise Funding: franchisor funding programs either from their own coffers or in partnership with lending institutions. In this, they utilize their relationship with the lenders to secure preferred loan conditions on your behalf.
- Traditional Financing: general banking institutions that offer loans to entrepreneurs. To attain these loans, entrepreneurs must have a solid business plan, good credit and collateral to guarantee the loan. Individuals must peruse all contractual arrangements such as interest rates, payment schedule, repayment amount and the bad debt repercussions.
- Small Business Associations: assists many individuals who failed to qualify for funding from the traditional lending institutions. They usually receive government or international unions funding that offer significantly lower interest rates and repayment conditions.
- Investing Retirement Funds: individuals invest their 'lump-sum cash' with money instruments such as 401k. They then use this investment as collateral for a loan to start the franchise. This is actually a very smart way of securing a loan where the interest earned from the investment forms a subsidy for the loan repayment.
- Home Equity and Second Mortgages: entrepreneurs use their homes as collateral. Due to this being a second mortgage, it removes the pressure of presenting a bulletproof business plan. However, the use of this type of loan must be last resort due to the high risk of losing their homes.
- Loan Sharks: non-conventional, informal lenders. Avoiding these individual is paramount as their interest rates are much higher than average rates and their loan conditions are harsher. These individuals may also have links to the underworld and illegal economy and may expose your establishment to potential legal action.
