Advisory Jan, 20 2012

Ask franchisor for best funding options

If you think financial constraints restrict you from starting your own venture then taking up a franchise could be a better idea. But before taking up a franchise do clarify whether the franchisor provides financial assistance or not. Explore more

By Abha Garyali
Sub Editor
Ask franchisor for best funding options

Majority of the young business aspirants are not able to realise their dream of starting a venture because of monetary reasons. No doubt there are a numerous funding option available in the market but lack of knowledge and awareness among youth sometimes restricts them from realising their dreams. However franchising provides them an apt opportunity to take up a venture of their choice. Franchising is proven, risk free business model. Here franchisor not just gives his brand to the franchisees but all his expertise to make it a success. To add to this is the financial assistance and knowhow of the various funding options.

Financial assistance from franchisor

Though franchisors mainly provide financial assistance, but a franchisee also needs to take up an initiative in asking the franchisor about finance funding options. Franchisee should openly discuss with the franchisor whether he would get any financial guidance from the franchisor or he has to get finances with his own contacts at the initial stage only. An aspirant needs to be very careful while selecting his franchisor as per his requirements. Here are a few ways for asking guidance from the franchisor.

Preparing loan package: The best source for getting loans is the bank. Therefore the first challenge for any aspirant is preparing a loan package for seeking business loan from banks. Bank wants to work with serious borrowers. An entrepreneur should be serious enough to get the bank loan sanctioned and should have all the necessary documents that a banker needs. Furthermore, banks look for specific information to understand if the business is fit for their very specific lending criteria. Few franchisors recognise that many of their current and future franchisees would benefit from assistance when seeking a business loan and therefore, they step up to support them.

Guide in terms of right lenders: Many aspiring franchisees have to move from one bank to another for getting loan. This takes a lot of time and also proves to be inefficient and ineffective. Therefore the most important thing that an aspirant should do to successfully obtain financing with the best possible terms is to get requests in front of a large group of lenders who are interested in the loan request. This can only be achieved with the guidance of a franchisor. Top franchisors invest in platforms and meet with a wide array of lenders. These franchisors may provide their current and prospective franchisees with a list of lenders they may have come across through the years.

Knowledge of franchise system: Banks will only get interested in giving loan if they are sure that the business will perform well in future. Therefore good banks require an understanding of the franchise system as well.  Aspirants are mostly novices and may not have the required knowledge or the information. In such circumstances it is important to make sure that franchisors are ready to pass on the required information on their franchise systems to banks or other lenders.

Guidance for complex questions: Being a novice in business, the aspirant may not really be well informed about the financial terms and their meanings. However when he starts looking for financial help from banks and other lenders, financial terms like ‘Debt Service Coverage Ratio or Loan To Value (LTV)’ may come up which he is totally unaware about. Franchisors that support their franchisees with financing are standing ready to address these questions. Therefore, franchisors can take out their prospective franchisees from this difficult situation.

Post opening financial help: A new franchisee’s capital needs can never end after the opening of his outlet. Instead, franchise owners will need more capital to remodel and upgrade equipment from time to time. It is well known that franchisors come up with new ideas and technologies to upgrade their franchise network. Franchisees have to adopt these latest add-ons for better results. Moreover in later stages a franchisee may also want to expand his outlet to another location. He needs some capital help for all these purposes as well. Therefore it is essential for an aspirant to select a franchisor and franchise system that guides and supports him with financing always.

Aspirants not only invest money and time in a franchise but also invest their dreams and hopes for success in it. Therefore selecting a helpful franchisor that can assist his partners in all the possible manners is very essential. Few franchisees in a hurry to take a franchise do not ask and clear all their financial doubts with their franchisors. This can lead to a lot of problems between both at a later stage.

Related: How can you benefit from refranchising ?

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