Franchise Tips: Applying for Finance
More questions on running a franchise? Find out here
More questions on running a franchise? Find out here
Applying for finance in general involves due diligence and consideration but applying for finance for a franchise opportunity requires extensively more research. This is the reason we have created this article to provide you with helpful tips during your finance application to ensure that you don’t miss any vital steps.
The Overlooked Step
The first and often overlooked step when apply for finance is, checking whether it’s right for you. Once you know what to expect in terms of costs and returns for your opportunity, you need to assess whether the financial implications of the opportunity are viable for you in your specific circumstance. Even if you find a franchise perfectly suited to your interests and skills, if you cannot meet the financial obligations or cannot afford the risk of missing the obligations, then the opportunity isn’t for you.
Franchise Finance Forecasting
During your finance application you will have to create a business plan which will outline many elements that will be used as proof to lenders that your franchise venture will prosper. Within the business plan you need to forecast how much you expect to make each year to evaluate whether the proposition will be profitable. Forecasting the opportunity is vital to the business plan, but it is also a due diligence step for yourself.
Are you going to make enough profits to not only keep the franchise running, but also provide enough income to support your personal financial requirements?
Even though it’s not the positive thinking mentality many of us strive to achieve, forecasting potential losses must be a step you take in this process. If this opportunity doesn’t work or if you hit hard times during your career, how hard is it going to hit you? If you are risking everything for this opportunity and it doesn’t work out, are you ready to handle the fallout? This is a question you must ask yourself if you are in this position. In certain circumstances, it is better to wait until you are more secure before starting a franchise opportunity, but only you can answer this question.
Equipment costs can often be overlooked during the forecasting process as depending on the franchise opportunity, it may be an additional cost that you haven’t been informed about. Speak to the franchisor to understand what is and isn’t covered in the franchise fees to ensure you can accurately forecast the true cost for the opportunity.
Are you planning to run this franchise opportunity as a one-man band or will you seek to hire or use additional personnel to assist in its operations? This tip involves two main areas for consideration, firstly have you truly understood your operational commitments? If you don’t know exactly what the opportunity involves, then you cannot accurately determine if you can fulfil its obligations alone. Secondly, can you afford to hire a second or more person to assist you and if you can, will it then still be profitable enough for you personally.
Forecast Return on Investment
The return on investment should be the most influential forecast to determine if you want to proceed with the opportunity. If you’re not going to make your return within 30 years, then is it really the best use of your capital? Starting a franchise isn’t like a normal job where you want a consistent salary. It’s more of a risk/reward scenario where you take the additional risk so you have the opportunity to receive a greater reward.
Your Credit Score Matters
Similar to applying for any kind of finance, the lenders you approach will look into your credit score. You must remember that when you are applying for finance for a franchise opportunity, the lenders will not just evaluate the opportunity itself, they will also evaluate you and your credit score.
If you have a bad credit score but know that you can meet the financial obligations, then alternatives do exist. Family and friends are a great place to start as they won’t likely charge interest or if they do it won’t be at the same rate as a lender. Franchisors sometimes will lend you a percentage of the investment cost themselves, but they of course will assess you as well. The other option is to secure the loan against an asset such as your house. Each one of these involves their own risks so be sure to evaluate every possibility to understand what’s right for you.
As with most things in this world, you don’t always succeed on your first try, this is the same as applying for finance for a franchise opportunity. They’re many banks and lenders that will consider your application and they will all evaluate your proposal differently. Just because you have been unsuccessful with one bank, doesn’t mean that the opportunity isn’t good. If your about to give up, remember that JK Rowling’s manuscript for Harry Potter was rejected multiple times before it became a hit. If you truly believe in the opportunity, then keep going for it and take learnings from each application.
If you want additional information on franchise funding, then this article will help – Franchise Finance Guide: Introduction into Franchise Funding
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