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Franchise Financing 101: A guide to funding your franchising dream

savings, finances, economy and home concept - close up of man wiBy Steve Iskierski
Purchasing a franchised business is not an easy process. As a prospective franchisee, you must take your time, performing a great deal of research and due diligence before finally making the decision to buy.

Following this decision, your focus will turn to financing and the several funding options available to you. In most situations, this will bring you straight to the doors of your local bank. As you take the next step in your journey, it is important to know what to expect.

You may find this experience frustrating or confusing; you may also feel uncertain about how to effectively and convincingly prepare for meeting a banker. How do you communicate what is needed? What should your application include? Who should you approach? When is the best time to involve the bank? Thankfully, by finding the right banker and developing a detailed financial proposal, you can address the key points you need in order to fund your new franchise.

What are bankers looking for?
Very simply, bankers expect to see (and have you verbally communicate) a realistic business plan, including what you believe are reasonable and achievable results. Business projections must be based on strong supporting data and sensible assumptions. This data is typically presented in what is called a bank financing proposal, a written document designed to deliver the following:

  • a comprehensive business plan, including details as to how your business’s goals will be achieved;
  • the amount of money required and from what sources;
  • how the money will be used;
  • how your loans will be repaid
  • what the banker may expect to see in terms of overall business results (consider preparing a three-year financial forecast); and
  • what collateral will be provided (such as a general charge over all business assets, personal guarantees, etc.)

All major financial institutions provide publications on this subject, which often detail examples of what should be included and how to best present it. Given these resources, there are no excuses for not being aware of the bank’s expectations.

When preparing your proposal, be thorough and accurate—there are no short cuts to be taken in this process. Also keep your proposal simple and factual. Acknowledge any possible risks or potential pitfalls that might arise from granting you a loan. Not only is this honest, it will also illustrate you are aware of the relevant risks and show the banker you are able to anticipate and manage them. Include a one or two-page summary that briefly describes the business opportunity, its history, where its future lies and the money you require to get it there.

Overall, your proposal should include:

  • A cover page with your name, address and any other key contact names (e.g. your lawyer and accountant);
  • A table of contents (including page numbers);
  • A summary of the financing being requested;
  • An overview of the industry you plan to enter (e.g. key drivers, demographics, trends);
  • Your management structure (people, background, qualifications and responsibilities);
  • Descriptions of the products/services offered by the franchised business;
  • Details about your prospective new market (e.g. size, competition, supply, overall standing);
  • A financing outline (emphasize the use of requested funds);
  • Basic corporate information about your individual franchised business (names of your shareholders, lawyer, accountant, etc.); and
  • Appendices (these can include individual biographies, product literature, historical financial statements, forecast income and cash flow statements).
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