First-Time Franchisee? Financing Facts You Need to Know

When you are searching for financing for your first Canadian franchise, you may be surprised by some aspects of the process. Since franchisors require an initial investment, the upfront cost to franchisees can be a challenge to secure. Lenders will expect many things from you, so be prepared for some intrusive requests and strict requirements.

Your financial stability matters more than you may think

The lender will expect you to pay them back, so you have to show that you are a worthwhile risk. This means demonstrating evidence of previous success and/or having cash reserves. This, unfortunately, is much like when you first tried to get a job without having experience and all the employers you applied to were looking for someone with experience.

In addition, the lender is not going to rely on your business repaying your loan. While that is likely your plan, the lender wants the money back whether your business succeeds or not. This means you need to show that repayment is available from another source, such as a partner's income, cash, or your personal investments. Essentially, keep in mind that your risk evaluation will not be completely focused on your expected yet unproven business revenue because your business isn't actually producing anything yet.

Your personal property may be on the line

You can use business ownership structures in Canada to protect your personal property in the event your business fails. However, your lender may want to get around that to lessen your borrowing risk and require that you sign a personal guarantee in exchange for the financing. This works exactly as it sounds; your personal property and assets can be taken by the lender if you default on the loan. This means that even if the business fails, you will still have to pay the loan and that the lender can take your non-business property if you fail to keep up on the payments. In some cases, people with failed businesses have spent years after they closed its doors paying back the money.

Don't be dissuaded

A franchise works because its franchisee is dedicated and uses its resources to make the business a success. As you consider financing for your franchise, don't be surprised when you receive some demanding requests from your lender. Prepare yourself for this step beforehand so you can get it secured and move onto the next phase of your new business.