How to Get a Loan for a Franchise

How to Get a Loan for a Franchise

You might be wondering how to get a loan for a franchise. If you’ve been dreaming of running a small business in Canada, franchising might be a quick way to achieve it.

The truth is that it is pretty straightforward. Many large businesses want to spread their branches far and wide, and some are willing to loan you money as a franchisor.

To get a loan for a franchise,  you can contact the franchisor, financing companies, banks, etc. You might choose to access business loans or simply get lenders to pay your suppliers.

Also, Canada’s small business financing program is another option. But the amount of money a particular lender will lend you is up to them.

In this piece, we’ll take a look at how to get a loan for a franchise, where to access the loan in Canada, eligibility requirements, and more.

How much money can I borrow to start a franchise?

You might need a little less than $50,000 or up to half a million. However, to know the exact amount you can borrow, you need to start by researching the specific franchise you’re interested in.

Look for official documents or contact the franchisor for accurate information on the required initial investment. This will help you avoid borrowing too little or more funds than you need.

Next, design a comprehensive business plan and approach different lenders, such as banks or credit unions. They’ll evaluate your financial situation and provide you with an estimate of how much they might be willing to lend.

How does a Canadian resident qualify for a franchise loan?

Eligibility requirements are another factor to consider when considering how to get a loan for a franchise. The following are things that qualify you for a franchise loan as a Canadian resident:

Collateral

Many lenders would require an asset to be used as collateral for the franchise loan. The amount and type of collateral needed to borrow money will vary by lender.

This could be real estate, valuables, or equipment. The higher the amount of money you need to borrow for your franchise, the higher the collateral value required.

Credit Score

You also need to meet this condition if you want to apply for a franchise loan. Banks do not give out loans to individuals with low credit scores.

In this case, your next choice would be to explore other options available that have been explained in this article on how to get a loan for a franchise.

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Tax Report and Insurance Policy Details

Anyone parting with their money to make your franchising dream a reality needs to be certain that their funds are in good hands. Lenders can get a sense of your financial stability from things like your tax return and insurance policy information.

Business Plan

This requirement is the icing on the cake, and it can make or mar your loan approval. You should have a solid business plan in place before approaching a lender.

This is an essential tip when considering how to get a business loan for a franchise. It should explain the idea, cash flow projections, sustainability, objectives, and how the funds would be utilized. 

How to get a loan for a franchise in Canada

Now that you know what to do to qualify, you may wonder where you can get franchise financing. We’ll explain this in detail in this section of the article on how to get a loan for a franchise in Canada.

The Franchisor

The franchisor should come to mind when thinking about how to get a loan for a franchise business. Some franchisors step up their game by offering a helping hand to new franchisees. That is, they’re not just tossing the keys to the franchise castle; they’re also chipping in on that initial franchising fee.

They could also form a powerful alliance between themselves and big-shot lenders—the commercial banks. These tag-team champions join forces to help you raise the capital you need to kickstart your business journey.

However, companies that offer this opportunity to their franchisees do indicate it on their franchise disclosure document. You’ll also find it on their website.

Franchise Financing Companies

They’re like expert matchmakers for aspiring franchisees, connecting them with the ideal lenders to meet their financial needs. Also, these companies not only play matchmakers, but they can be direct lenders themselves.

Suppose you don’t find the perfect lender match. In that case, they can swoop in and become the financial fairy godmother to your new business venture. So, whether you’re starting a trendy coffee shop or an out-of-this-world gaming arcade, these funding specialists are here to make your franchising dreams a reality.

Some of Canada’s best franchise financing companies include Loans Canada and Smarter Loans, among others.

Banks’ Business Loans

This is another way to get a loan for a franchise. You can think of applying for a business loan at a bank or credit union as pitching your idea to the “money maestros.” They’ll want to know if you’re financially savvy and whether you have a good track record in handling money matters.

Your creditworthiness becomes the star of the show. If you’ve got a solid net worth and a sparkling credit history, you’re one step closer to funding your franchise dreams.

Also, some banks might ask for a little extra security in the form of collateral. It could be real estate, equipment, or any other valuable asset you’re willing to offer up as a pledge.

Once you’ve met their criteria and presented your brilliant business plan, they will likely work their magic and offer you a loan. Some Canadian banks you can contact for this type of loan include National Bank, Tangerine, Meridian, etc.

How to Get a Loan for a Franchise - comparewise

Borrowing As a B2B Company

This is a nifty trick to get some cash flowing your way as a B2B company. It’s called “factoring.” That is, you can use your clients’ invoices to get money from lenders.

So, here’s how it works: When you need some cash in a pinch, you hand over your clients’ unpaid invoices to a factoring company. They come in and collect the total amount that your clients owe. Then they work their magic and advance you a portion of that money upfront.

Think of it like a cash advance for your business. Also, the ‘factor’ company deducts any fees they have and the amount they advanced you. Once all is said and done, they hand you the remaining balance. That way, you’ve got cash in hand, and your business keeps chugging along.

Getting Lenders To Pay Suppliers

A conventional loan will provide you with a lump sum of money you can use however you see fit. However, it might not be available to you if you’ve got a bad credit score or other issues. Your next option is to opt for purchase order financing. Here, the lender pays your suppliers directly.

This is how it works: Say you have these fantastic orders pouring in but are short on funds to pay your suppliers.

What you do here is march right up to your lender and show them those orders. They’ll be impressed. Then, the lender steps in and takes care of paying your suppliers for the goods you need to fulfill the orders.

The effect is similar to hiring a cash-flush wizard to ensure the smooth operation of your company. And the best part? You get to focus on what you do best—growing your business.

Get Funds Through Good Reputation

Suppose you’re eyeing a franchise from a super-reputable business. In that case, you might just be in for a sweet treat regarding financing. Lenders out there have their own secret lists of franchise businesses they love. These are the ones with impeccable repayment histories.

So, if you pick a franchise from this A-list, you’ll boost your chances of scoring that much-needed financing. It is the equivalent of getting a thumbs up and a nod of approval from the lending institutions from the get-go.

Also, you don’t have to stumble around in the dark to find suitable lenders. Your franchisor can introduce you to lenders already smitten with your franchise choice.

Canada’s Small Business Financing

Canada’s Small Business Financing Program is like a superhero for small businesses. It swoops in to make getting loans from financial institutions a breeze. How? By ensuring that you share the risk with those lenders.

Recent changes in this program have brought in awesome stuff like additional financing products, more significant loan amounts, etc. That’s not all. They’ve also made things easier by reducing the pesky administrative burden.

How to get a loan for a franchise conclusion

When thinking about how to get a loan for a franchise in Canada, know that the journey can be exciting. It is also filled with various options and possibilities. From reaching out to franchisors, financing companies, and banks, aspiring entrepreneurs have multiple paths to realizing their dreams.

With careful research and a solid business plan, among other criteria, you can find the perfect financing solution to kickstart your franchise journey. Do the research and compare lenders’ interest rates before making a choice.

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FAQs about how to get a loan for a franchise

Can I use government programs or grants to finance a franchise in Canada?

Yes, several government programs and grants are available to support small businesses, including franchise ventures. These programs, including the Canada Small Business Financing Program (CSBFP) and regional grants, can offer funding assistance to qualified entrepreneurs.

What are some financing options available specifically for Canadian franchisees?

In addition to traditional lenders, Canadian franchisees can explore specialized financing options. This includes the Canadian Franchise Association's (CFA) Financing Program. This program connects franchisees with lenders familiar with the franchise industry. As a result, they could potentially make the loan application process smoother.

How does the franchise agreement impact my ability to secure a loan?

The terms of the franchise agreement can influence your loan approval. This is because some lenders may review the agreement to assess the viability of the business. So, ensure you thoroughly understand the franchise agreement, its terms, and any associated fees before seeking financing.

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August 7, 2023
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