How to find the finance to buy a franchise
Buying a franchise is top of your must-do list right now but you need to be able to fund the purchase.
There are some essential questions to ask yourself before you take any more steps towards finding the perfect franchise:
- What assets do I have?
- Do I need to get a bank loan?
- How good is my credit rating?
The critical element in getting funding from a banking institution is your credit rating. It’s easy enough to access your credit report online and this will give you insights into any blips in your credit history that you may need to address.
You will stand a much better chance of accessing funds from a bank if you are seen as a good risk.
Evaluate your assets – these can include property, investments, cash and savings. How much do you have to offer as financial security?
Banks will offer secured or partly secured loans; a business mortgage loan might give you a cheaper line of finance but you will need sufficient assets to pay off the bank if you find yourself in the unfortunate situation of being unable to repay the business debts so the question of mortgaging your home against a business is a crucial one to consider.
Then consider your debts: it is worthwhile reducing any debts to free up your money before you approach a financial institution for funding.
Expect to outlay at least 50 percent of the total investment of the franchise purchase in equity.
Some established franchise brands are accredited with one or more banks – although the number of franchise systems is much smaller than you might think. Such accreditation allows the franchise buyer to borrow up to 70 percent of the purchase price based on the reputation of the franchise system and the value of the franchisee’s business.
Banks inevitably favour established brands which can demonstrate consistent cash flow and success in a variety of locations over periods of economic upturns and downturns.
That might influence your choice of franchise.
7 questions to ask about funding for a franchise
- Does the franchisor offer internal financing?
- Is there a limited period guaranteed income?
- Can your family help fund the purchase?
- Should you mortgage your home to buy the business?
- How much working capital will you need?
- How will you structure the business to maximise tax and superannuation considerations?
- Will you need your spouse to continue working to bring in a reliable income until the business can support you both?
When you are ready to buy a franchise
Get organised before you approach the bank.
The bank will want to see a personal financial statement, tax returns and documented evidence of the equity you have.
Presentation counts, so the more professional you look, and the more you are able to demonstrate you understand the business proposition and how you will repay the bank the better your chances of success.
So what if it you can't get funding right now?
Can you buy a franchise with no money?
If you can't get funding here's why it might be a problem.
You may need to rethink your franchise options or consider whether another investment option might better suit right now.