6 Franchise Financing Tips for The First Time Franchise Investor

franchise financing

When dealing with financing a franchise for the first time, there are many things that you will encounter that you have not dealt with before. This process can be quite complicated for those who don’t have a background in business or finance and getting help with finding the right loan and financing options for you can make the process smoother.

Most lenders will want to know all your liabilities, business experience, and net worth before moving forward, so having these numbers and information can be a way to cut down the time it takes you to get the financing you need. However, there are more financial needs that just the initial franchising fee. This can include the cost of inventory, construction for building setup, and other issues along the way.

Getting financing itself is hard enough, but you want to ensure that you are getting a big enough loan to cover all the costs for franchise financing. With these 6 financing tips, you will be able to ensure that you get all you need to start your food truck franchise or restaurant.

1. Talk to Your Franchisor

The first step in many situations will be to speak to the franchisor themselves about what the best decision would be. With the franchisor dealing with multiple people in the same scenario as you, they will likely have some tips or suggestions for who to go to for the size loan you need and they can walk you through all the expenses that you will need to have covered.

They are there to ensure that you have the best chances of succeeding, so don’t be afraid to reach out and see what they have to say. They will almost always have a suggestion for what to do when you need some help.

2. Search For Lenders Who Understand Franchises

Not every loan officer or lender will know what goes into franchise financing specifically, and having someone help you with the details is crucial. So, if your franchisor doesn’t have a certain lender in mind, then look for lenders who have experience with this type of financing.

You may also want to make sure that the lender has dealt with franchises under 100k. Some lenders have only financed larger operations that cost a few 100,000 for the startup. This is not necessarily helpful for someone who is purchasing a smaller business, so you want to know that the lender knows how to handle a smaller franchise.

3. Be Upfront With Your Lender

Having debt or missed payments for certain things throughout your life is not a deal breaker when it comes to getting franchise financing, but trying to leave them off your application or hide them can cost you. Explaining the situation and being honest about what your financial struggles were at the time can go a long way with the lender, and the more they trust you, the more willing they will be to work with you.

Don’t think that you need to explain every little bump along the road, but get the big issues out of the way and let them know that you are committed and prepared to take on the financial responsibility now. If they see that you have worked your way to becoming self-sufficient and will make sure to pay off your debts properly, a small issue or two won’t cause them to reject you.

4. Keep Liquid Capital

If you have quite a bit of debt already, and you want to apply for financing for a franchise, you might be tempted to pay off a large sum of that debt to make yourself look more appealing. This can be good for some, but you need liquid capital to start your business, and if you’re paying off debt will significantly lower your liquidity, then this could actually hurt you.

Having debt is normal and lenders need to know that you have money available for this venture. So, although paying off a small portion to lower your total debt amount if good, don’t go overboard and sacrifice your capital for a lower debt amount.

5. Don’t Drown Yourself in Debt

A rookie mistake with franchisees is that they can take out too much debt at once. Even if you have the best franchise to own, it will still take time to make money. If all your money for the business is from a loan, you could be setting yourself up for a disaster. You want to make sure you still have some money aside when issues arise and you need to pay for something.

If you’re simply using the loan money for everything with the business, you may have taken out too much and spent a lot of the money for just the startup. This won’t leave you much for the rest of the time, and if something breaks or an unexpected bill comes up, you could be in a bad position. Remember that you need cash flow to pay back that debt.

6. Purchase Used Items

When it comes to saving money, buying small items for the store can make a big difference in your bottom line. If you’re taking out a loan to cover your startup costs and expenses, you want to ensure that you can have enough for what you might need in the future. Looking up prices of used furniture, registers, or kitchen equipment can lower your total cost.

This will allow you to save some of that loan money and be ready for anything that comes up in the future. Also, you will want to talk to your lender about your plan to keep your costs lowered, and they might be willing to work with you, even more, considering that they see you have already priced out the equipment you want and how serious you are about the business.

No matter what type of franchise business you are planning on investing in, you want to take your financial decisions seriously. Getting financing is a good way to get the money you need to start your business, but making sure you get the best option and greatest lender will ensure that you are successful.

Zacs Food Truck

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