Aspiring entrepreneurs purchase franchises for a number of compelling reasons. They often come with instant brand recognition, franchisees receive certain types of operating support from the franchisor, processes are already in place and they can generate an immediate revenue stream.
While these benefits are enticing, there are certain factors to consider before buying a franchise.
1. Figure All Costs into Your Budget
In a sense, a franchise is a bit like a piece of furniture you purchase that arrives in pieces. The price of the couch did not include assembly. Much like the couch, the franchise still needs to be “put together.”
Doing so requires working capital. You must have money to get the business up and running. Otherwise, you will find yourself in a cash crunch and risk complete failure. Fortunately, business loans can solve this problem. Make sure you calculate and include the cost of working capital into the amount when applying for a business loan.
2. Take a Deep Dive into the Contract
Make sure you have reviewed your contract thoroughly and understand all of the terms. This piece of advice may sound obvious, but not all franchisees read the fine print. And sometimes the devil is in the details.
Plus, contracts differ from franchisor to franchisor, so do not assume all agreements are created equal. Some of the important details to look for include:
- The owner of the lease on your location
- Revenue sharing obligations, ongoing royalty or repayment
- Requirements issued by the franchisor you must meet
It is a good idea to hire an attorney, who is already well versed in all of the terminology and legal jargon and can clarify anything in the contract for you.
3. Make Sure You Have a Parachute
The importance of establishing a fund you can use during lean times is one of the factors to consider before buying a franchise. Even with the best-laid plans, sales can stall and revenue can dry up, especially at the beginning. However, if you have money set aside for this purpose, you can squeak through the lean times and keep your franchise afloat.
Remember, even a franchise is a new business in some ways. Sales may fall short of projects for a few months or even the first year. Just make sure you have the funds to support the business through this period.
4. Get the Right Type of Loan
Figuring out which type loan and lender is best for your situation is one of the factors to consider before buying a franchise. While most people have heard of traditional bank term loans and SBA loans, you are not limited to these two forms of financing. Alternative lenders offer benefits that bank loans cannot.
These lenders are not subject to the rules and requirements imposed by financial institutions and regulatory bodies. This leaves them free to determine who can borrow money and the amount to lend them. Rather than being forced to check off a series of boxes, it is a process based on need and merit.
Alternative lenders get a comprehensive financial footprint of borrowers because they typically do not limit creditworthiness to credit history. They consider credit history in conjunction with many other factors. That said, you do still need to prove that you are prepared to repay the loan amount, as no lender wants to lose money.
The competitive nature of the alternative lending market tends to drive interest rates down – yet another perk of going this route. And the aforementioned comprehensive profile these lenders generate of borrowers also allows them to offer lower interest rates and fix them because they have more information at their disposal to determine how likely an applicant is to repay their loan. Fixed rates are even more important now that we are in a rising interest rate economy.
A Safe Bet to Consider When Buying a Franchise
ICA is THE alternative lender for Franchise Loans that are non-SBA and non-bank. We offer SBA Loans, as well. We can provide loans between $100,000-10,000,000 to qualified borrowers without putting up their personal collateral.
Our process is quick and much easier than traditional bank financing; we can get you approved and funded within 30 to 45 days. We work with well-capitalized hedge funds to offer a wide range of loan amounts and desirable repayment terms from 3-10 years. We also do not usually impose any prepayment penalties.
Interest rates are low, with fixed-term rates starting at 7.5%. We help set you up for success by taking the full financial picture into account, basing loan amounts on total project cost including working capital.
First-time business owners are welcome, too! We understand that you have to start somewhere and the franchise you are purchasing has a system that has proven successful even if you do not have an extensive business background.