Financing Methods

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Financing Methods.

Over time, it has become increasingly popular for people interested in business ownership to turn to the world of franchising for help. Recent research has shown that when comparing various types of start up business options, the failure rate for successful franchises is much lower than for other types of businesses. In most cases, purchasing a franchise is like purchasing a business model that is already proven to be tried and true. However, the average purchasing costs for starting franchises are fairly steep, including franchising fees, equipment, product, fittings, stock and working capital. This means that one of the most important considerations made by any potential franchisee is how the business is going to be financed in order to cover all these initial costs and start trading successfully.

Some people are generally capable of funding the initial purchases based on their own personal resources, but a great deal of potential franchisees will rely on financial support to get their franchises off the ground. In order to qualify for a traditional finance option such as a secured loan from a local bank, you will generally have to have some start up capital to throw into the business as well. However, many people do not realize that there are a handful of other potential options for financing. These are useful for people who do not have the start up cash to convince a bank to lend them the rest of the start-up money. Asset finance, trade finance and working capital finance are also great options that can be used to the franchisee’s advantage when it comes to getting through the initial start up phase of the new franchise.

Bank Loans and Lending

Your first port of call when looking to finance a franchise as far as lending is concerned is probably going to be your local personal or business bank. These high-street banks have specialists in the field of franchising which can help to advise you on many subjects, including products and services which are custom tailored for your specific needs and the current market. It can really pay to shop around and to select a deal which is perfect for you and your individual situation. Generally, before you are approved for a loan, you will find that most banks prefer that you contribute a proportion of the start up capital needed from your own individual resources. This can be as much as between 30 and 50 percent of the costs, though the amount can vary wildly depending on your own circumstances and the lender. Lenders typically require collateral to protect their investment just in case you cannot meet repayments or happen to default on the loan later on. Some lenders require a second-charge mortgage on your residence, while others are satisfied simply with a personal guarantee.

Savings

This is not a viable option for everyone, as it requires you have a substantial amount of capital tied up in savings. If you have been building a nest egg over time and would like to use it to help fund your franchise purchase in part or completely, you may find it much easier to obtain funding directly from your bank or another source of lending. Lenders typically prefer that they are not the only source of start up capital. This means that you may have difficulty convincing a bank or lending agent to work with you if you have no start up capital of your own, but if you bring between thirty and fifty percent of the funds necessary to purchase the franchise to the table, a lending agent or bank agent will be much more likely to approve a loan for the remainder of the amount needed. Unfortunately, while having this type of money on hand is crucial, not everyone is this well off to begin with. Luckily, there are other options for alternative funding sources that may be suitable.

Investments

Drawing funds out of your investing vehicles may be a more risky, or perhaps a more costly option for obtaining some or all of the start up cash needed to purchase a franchise. This is because many investment types actually assess fees when you draw money out of your investments before you are meant to. So if you tap into your retirement fund before a specific time, or if you sneak into an IRA fund or a CD before the specific time limit has been exceeded, you may find yourself being taxed a little harder than what was expected. If you do not want to lose valuable money to needless fees, you may want to avoid this as an option for obtaining start up cash. On the other hand, if you have enough stored in investments so that it would be worthwhile to pull the money out even with the fees, it may be worth considering as a viable option. Some people, for example, use part of their retirement nest egg to fund the startup for a new franchise. This is a risky practice, but if the franchise in question is a sound business and can provide profits, it may be well worth the risk.

Family

This is the least risky option for franchise start up funding, because it involves borrowing start up capital from your friends and family members rather than from a banking or lending institution. This will usually mean no interest or other fees, and friends and family members are typically much more patient about repayment. You should never take out a loan that you cannot pay back, and this applies both to official lending institutions and family members. However if you are looking for enough startup capital to purchase a franchise, or at least enough to convince a bank or other lender to lend the rest to you, this may be a very viable option for you.

Considerations to Make

Drawing money out of investments, borrowing from family, emptying your savings and applying for a loan through a bank or another lending institution are all opportunities with various levels of risk involved. Purchasing a franchise should never be a simple decision, because there are a lot of people and a lot of decisions involved that need to be thoroughly considered beforehand.

That said, here are a couple of considerations to keep in mind during the process:

  • Purchasing a franchise is a business venture which comes with little risk, low costs and potentially high rewards, at least when compared to other potential small business ventures. So if you are looking for a tried and true business venture that works as part of a larger chain in a successful company, purchasing a franchise may be the best way for you to go. Franchises are not necessarily foolproof business ventures, but with a larger company standing behind your individual franchise location, you can typically accomplish a great deal.
  • If you are taking a route that involves borrowing start up capital from a bank or other lending institution, it is important to have a business plan in place. A business plan is an absolutely essential part of convincing creditors and franchisors alike that you are serious about your plans, have thoroughly considered your idea, and that you are completely confident that your business growth will be strong enough to pay off the money you have borrowed within a reasonable amount of time. You need to be able to summarize all your plans, presenting an overview of your business plans along with a projected return on investment (ROI), risk analysis, general strategies, marketing information and competitive strength.

Your business plan should have a mission statement that informs your reader of your core values, and essentially what is going to make your new business tick. Next, your business plan should include an analysis of the industry that explains how viable the business opportunity will be in a specific market. You should also include the following if possible: demographics analysis, marketing and advertising plans and strategies, and a working timetable for meeting all of your goals over a specific period of time. The importance of a business plan plays on the fact that lenders, potential lenders and franchisors want to see that you have completely thought out your idea, and that you have a good working knowledge and understanding of the industry and various business aspects.

With a good working business plan at your disposal, you will find that obtaining the capital that you need through lending is easier than ever.

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