There are many issues when it comes to obtaining financing for your franchise. Future franchisees must do their due diligence if considering going the franchise route. Make sure that the franchise is a good fit for you. We will tackle some of the issues involved with obtaining a franchise loan.
Do Your Franchise Research
List your top ten franchises and look at their financial status. Make sure to focus on how much debt the franchises have incurred as well as sales and how profitable they are. Of course, brand name franchises with proven track records of consistency and profits will help you obtain the right financing. Keep in mind, the franchise owns the rights to the name and trademark of your future business. You are purchasing the rights to use their name. Take into consideration the franchise fees and royalty fees that are involved.
Small Business Administration (SBA)
Obtaining financing for your franchise can be a huge hurdle. If you are not in the same industry as the franchise you plan on purchasing, this may be a huge obstacle but not impossible. Getting financing through the Small Business Administration (SBA) may be a good option. The SBA does not lend to the franchisee directly. Instead, it gives a guarantee of repayment of the loan to the bank/lender, which makes it less risky for the financing institution. Going through the SBA can be a good option for your new endeavor. Franchises that are SBA approved may be granted expedited loan processing and other perks.
Is The Franchise Failing?
Your choice of franchise will also aid in finding the right franchise financing. A factor to look for is the default rate for the franchise of the loans. This can be found by a simple search in Socrata. This is a good indicator if the franchise is failing. Do your due diligence on the franchise before committing. Attend franchise conferences held by associations such as the International Franchise Association (IFA) and the American Association of Franchises and Dealers (AAFD). Attending these events will give you a good feel for the franchise and see if it is a good fit. Talk to existing franchisees. Ask them how they have become successful, as well as their day to day operations. Hear what they think about the brand and if the franchise offers internal financing for new franchisees.
Good Financial Credit
Finally, you have done your due diligence, narrowed down franchises, and looked at financing options. Guess what? None of this will matter unless you have good credit. No lender will give you a loan just because the franchise has a proven track record and solid cash flow. If your personal credit is shot, chances are your dreams of franchising are out the door. Check your credit and work out the blemishes on your credit report. For more help, please visit Lexington Law.
Not Reading The Franchise Disclosure And Agreement Documents
The disclosure document and franchise agreement are extremely important documents for future franchisees. These franchising documents explain your responsibilities as a franchisee. Review these documents with your attorney. If you do not have an attorney, retain one who has experience with franchising.
Go over both agreements and ask for clarification if you do not understand any of the verbiage. These agreements are standardized, however, the franchisor may be able to add additional conditions such as products or services. For example, if you purchase a convenience store franchise and the agreement states that you can offer brand “X” but you would rather offer brand “X” and brand “Y”, the franchise may be able to amend the agreement if you demand it.
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