Evaluating sources of financing
I think that it’s time to write a few words about financing your future franchise business. It’s evident that to start your business you’ll need money. You have to cover franchise fee, buy equipment, hire personnel and bear some other costs. The exact sum depends on the type of business and many other factors. But there is at least one thing that remains invariable: you have to look for and to choose the sources of finances.
I decided to say a few words about choosing the sources as it seems to me that there are some facts of misunderstanding or even false beliefs in this sphere. I’ll describe the main of them using “pro&con”.
Personal savings
Pro:
- this money belongs to you and if something goes wrong you will not have problems with paying back; bad results will not influence your credit history;
-you can start using them immediately (or just after talking over with your family);
-it costs you nothing (except the opportunity cost).
Con:
- in most cases personal savings are not enough to finance even 50% of prospective business;
- there is an opportunity cost of using them (the things that you planned to purchase for that money and the interest you received for them);
-as you don’t borrow money this transaction will not impact your credit reference when your business succeeds.
Bank credit
Pro:
-it’s the most common way to finance your business;
-if everything goes OK, you’ll contribute your credit history;
-bank has an incentive to finance only profitable and pay back projects. As a result they insist on business plan development and carefully evaluate it. So you’ll get professional and unbiased opinion concerning you franchise business almost for free.
Con:
-it costs you;
-to get a bank credit it’ll take time.
Small Business Association (SBA) credit
It’s close to a bank credit (I’ll write more about this form of financing later)
Private venture capital firms’ credits
Pro:
-they even credit the ideas deflected by banks because of high level of risk;
-they can give professional advice concerning not only idea itself but your prospective franchisor.
Con:
-the interest rate usually is much greater comparing to the one given by a commercial bank.;
-it also takes time to get such a credit.
Franchisor’s direct financing programs
Before comparing advantages and disadvantages of this way of financing I need to attract your attention to the fact that it’s also one of the advantages of franchising in general. The previous ones are used by any form of small business.
Pro:
- about a third of franchisors provide such programs, loan guarantees or leasing programs. As a potential franchisee you have an access to them but competition is lower in comparison with bank credit and other standard financing variants;
- you’ll have an advantage in securing loans because franchises have the credibility, reputation and experience of an established trademark.
Con:
-you become more dependent on your franchisor;
- it still takes time and you still have to pay an interest.
And don’t pay with you personal credit card as the interest rate will be too high. It can eat all you profit…
I’m going to continue sharing my opinion about finances in general and franchise finances in particular in next posts.