Financing your next franchise unit

If you already operate a successful franchise business, perhaps the only thing stopping you from opening another location is financing.

If you already operate a successful franchise business, perhaps the only thing stopping you from opening another location is financing.

With your skills and experience, a solid business plan, and the right banking partner, your chances of securing financing for another franchise unit are excellent.

Wondering which franchise is right for you? Consider this:

  • 90% of Canadians eat pizza at least once a month.[i]
  • A&W is Canada’s second-largest quick-service restaurant (QSR), with over 850 restaurants and over $900 million in sales.[ii] The company has launched a new concept to serve urban markets.
  • According to Global News, private tutoring is a thriving business. In Canada, Kumon has over 330 learning centres – and it costs from $100,000 to buy a franchise.

Once you select the right franchise for you, read on to learn how to prepare your approach to a lender to obtain franchise financing.

Research franchise-friendly lenders

Many franchisors have established relationships with lenders that can offer competitive financing packages to their franchisees, so ask your franchisor for a recommendation.

Some banks are more likely to approve franchise loans than others, so it’s worthwhile to check up front whether a potential lender works specifically with franchises. Of course, if you are satisfied with the bank that financed your first franchise, you may want to continue to work with that institution.

  • Financing tip: Should you borrow money to open a franchise or use your own funds? According to the British Franchise Association, although you may have enough cash to finance a franchise, depleting your personal capital may be a mistake because you may need quick access to cash down the road.

Explore loan guarantee programs

Some franchisors offer loan guarantee programs to help their franchisees qualify for a loan. With a loan guarantee, the franchisor minimizes risk for the lender by agreeing to repay a set percentage of the loan if the franchisee defaults on payment.

As a Canadian business, you may want to speak to a lender about the Canada Small Business Financing Program (CSBFP). This loan guarantee program between the federal government, Canadian banks and credit unions offers financing up to $350,000 toward leasehold improvements and equipment, and up to $500,000 to purchase or improve commercial property. Although the program requires franchisees to fund their franchise fees and other costs, it’s a good option for those who need additional capital to get up and running.  Ask your banker for details.

  • Financing fact: According to the Canadian Franchise Association, 25% of prospective franchisees seek a franchise investment worth $100,000 to $300,000.

Prepare a loan package

A potential lender will want to see a detailed business plan, information from the franchisor (such as your franchise agreement and lease), and a personal financial statement with your historical financial data (including assets, liabilities, and income sources). Plus, you may need to supply current financial statements for any existing franchise units you own.

If your next franchise will be co-owned, you’ll need complete financial statements from each investor, as well.

  • Financing tip: According to an article in The Globe and Mail, avoid entering a franchise agreement where both you and your spouse have to guarantee the contract – it simply gives the franchisor the option to sue two of you if the business fails.

It’s wise to prepare your personal financial statement early in the process to determine how much financing you need. Keep in mind that your lender will likely ask how much of your own resources you’re willing to invest.

Obtain a bank credit report

When you’re ready to apply for a loan, ask your franchisor to provide a bank credit report to your lender. This document provides relevant information about the company’s credit history, and can indicate the potential profitability of another franchise location – an excellent way to support your application.

Lean on industry associations for help

There’s no reason to go it alone when buying a franchise. Find resources to help make your latest franchise opportunity a success on the Canadian Franchise Association website.

Talk with Scotiabank franchise experts

At Scotiabank, our advisors understand franchisees.  From start-up to exit strategy, we provide what a franchisee needs for success. Our franchise specialists are ready to help you – just as we’ve helped thousands of franchise owners across Canada.

Get more business advice, access helpful resources and learn about available financing solutions by speaking with a Scotiabank Small Business Advisor today.

Helpful tips

(Disclaimer: The advice provided in this article is for informational purposes only.  You know your business best – so be sure to implement what works for you and contact professional advisors as necessary.  Starting a franchise includes many costs associated with opening a business.  Investigate all the costs in addition to franchise fees.)

[i] Source: Technomic

[ii] Source: Wikipedia