You want to buy a franchise but how will you finance the purchase price and start-up costs?
Check these steps before you decide whether or not to put your home on the line for your business venture.
1. Calculate your net worth
Add up your assets, subtract your debts and you have your net worth.
2. Get a copy of your credit rating
Your credit rating will show whether or not financial institutions view you as a good risk.
3. Evaluate your circumstances
Should you use cash to pay off other debts rather than borrow to purchase the franchise? This can include credit cards, student loans, store cards, personal loans and any other payment plans. If you can clear all other debts then this may be more attractive to a financier.
4. Consider asset protection issues.
Your home is probably your single biggest asset but there are risks to using it as security for a loan so ensure you understand these and make an informed decision.
5. Are there other options?
Would you be better off borrowing money from friends and relatives or using other assets?
6. Understand all the costs involved
It isn’t just the purchase price you need to fund; working capital is essential to keep the business afloat until it starts turning a profit.
7. Should you stay in your job?
Think about either your or your partner maintaining their employment – a steady pay cheque can take care of the mortgage while you establish your business.
What is your appetite for risk?
Remember, if you borrow against your home then you risk losing it if your business fails. Are you at the right point in your life to risk this?
Andrew Graham, the national head of business solutions for RSM Bird Cameron, says “If you have other assets of value, such as investment properties in addition to your primary place of residence, then consider these assets as collateral for your new franchise. This may be a way of managing risk to protect your primary residence.”
Graham adds, “If you do mortgage your home, make sure you set the business up in a structure that protects your personal assets in the case of legal action or business failure. Shop around for the best interest rates, terms and conditions and type of finance that best suits your needs. This could include a combination of leasing, interest only or principal and interest borrowings.”
If you decide to go ahead and mortgage your home, it is critical to get professional advice to ensure you have adequately protected yourself and your family from the consequences of business failure.