The importance of Pre-qualification to a Franchise Investment
Similar to buying a home, it is vital that a perspective franchise buyer has realistic expectations, preparation and know cash flow capabilities to invest. For years, mortgage companies have pre-qualified borrowers to establish a price range for the home they would lend to. The benefits are many, including a pre-qualification provides tremendous buying power and the right guidance on lending ratios—debt to income level, for example. This knowledge gives the buyer confidence for making purchase decisions.
Investing in a franchise is very similar. The amount financed to own a franchise is an important consideration—debt service is a fixed cost that must be paid every month. Realistic business expectations, solid revenue and cost estimates, are critical to purchasing a franchise opportunity. The Franchise Disclosure Document [FDD], a FTC filing, is where you’ll find this. With this Document and your current financial records are what’s needed to easily achieve a funding pre-qualification.
Once a franchisor knows you have the financial capabilities, the more eager they will be to advise you in many areas such as site selection, space lease payment levels, potential sales territory and marketing plans even before you join their network. At Postal Connections we are able to guide people to funding sources and offer advice to make qualifying easier.
Here are some simple tips:
Be able to prove your financial status (Borrowing from your rich uncle, unless documented is not a serious financial status)
Be prepared to have funds available buy the franchise, run the franchise for several months and pay your bills at home.
Work with the Franchisor to understand financial requirements from signing an agreement (most franchises require payment of a fee), installation cost for the business, marketing cost from Grand Opening to reaching break even.
Use borrowing or leasing to an advantage. Borrowing can get you into business now and interest rates are at historic lows. Leasing does not impact your credit scores and if “closed-end” you own everything after the last payment.
Have enough money to advertise. A start-ups always need funds to build awareness and advertise incentives to try your business.
Understand how to use leverage and avoid over-extending. This aspect is very important and your chosen Franchise should be willing to give you straightforward and specific advice.
We’ll help you determine the best match for financing and cash management. Franchising is an active investment that requires ongoing work and capital. But the rewards are tremendous, as long as you finance properly based on thoughtful business expectations and a realistic plan for paying back the borrowed money.
Alan George, Franchise Marketing Systems
FMS is a team of expert franchise consulting professionals based in Canada that provides solutions for franchise development, franchise consultation, and expansion of businesses globally.