Franchise Financing in Canada: What Are Your Options?

financing solutions franchise
By Marketing team
October 24, 2019Articles

There's much to be said for becoming a franchise owner. In some ways it's really the best of two worlds; you're an independent, largely autonomous entrepreneur, but with all the infrastructure and brand recognition value of a big corporation at your disposal.

Yet even with all these resources on your side, finding a lender willing to fund you to the tune of $350K -- the average amount required to launch a new franchise -- is an intense, demanding process, especially if you have no successful businesses record to fall back on.

The following are just a few of the more common approaches people take to secure commercial loans and financing for franchise operations. While there are obviously other considerations to take into account, when push comes to shove, your timeline, risk tolerance and credit history will ultimately determine the best route for you to take.

Franchisor financing

Assuming you’re working with the right organization, this is a great place to start your quest for financing. Ideally, you'll have no need to look any further -- your franchisor will supply you with everything you need to get started, becoming a “one-stop shop” of sorts for your franchise business. It certainly simplifies things.

When your funding is coming directly from a franchisor, the lender will typically specify how much you can borrow, the length of your repayment term and most other conditions of your loan. As a borrower, you don't have much leeway to negotiate, and terms vary greatly among franchisors. Still, this is one area where working hand-in-hand with a large corporation can be beneficial: your franchisor understands the business and the risks you're taking on better than anyone, and typically has a vested interest in seeing you succeed.

If you're lucky, you may even benefit from incentives franchisors sometimes offer to help franchisees get their operations off the ground. This is common practice, particularly during periods when access to credit is tight. Such incentives may include discounted or deferred franchise fees, marketing support, and equipment buy-backs after six or 12 months of operation.

Some franchisors also offer discounts to veterans, minorities, and women, so it's always wise to ask what they can do for you before pursuing other financing options.

Despite these clear benefits, there can also be significant downsides. For one, franchisors are typically prepared to lend you more money than conventional lenders because they know those funds will be spent on their merchandise. This may seem wonderful on the surface, but it's easy to get in over your head and soon find yourself massively indebted to your franchisor, likely paying beefed-up interest rates to boot. If you can't sell that merchandise promptly, or worse, not at all, you'll find yourself wishing they'd never extended you so much credit in the first place.

Bank loans

If you have good credit, a reasonable down-payment, and a history of successful business ventures, you may qualify for a conventional bank loan.

A bank will of course want to review your business plan and personal credit history to assess your ability to repay the credit you’re seeking. The stronger your financial history and the higher your credit score, the better the terms and interest rate they'll be prepared to offer you.

Home equity loans

If your home has retained its value or you have a significant amount of equity built up, this time-tested approach to start-up funding is always an option -- assuming, of course, that you're comfortable putting your home up as collateral, with all the risk and exposure such an arrangement entails.

Business partners or investors

It's entirely possible you have all the skills, drive and talent to make your franchise a rousing success, only lack the money to get the business up and running. If this is your situation, consider joining forces with a money partner or angel investor.

While it may hurt having to give up a portion of your business just to secure the funds required to get into the game, it could well be the deciding factor of your ever owning a franchise or not.

Government-backed loans

Of all the financial products on the market, a government-backed loan is one of the most desirable options for aspiring franchisees. Known as SBA loans in the United States, these are small business loans provided by conventional lenders, with a significant portion of the amount guaranteed by the federal government.

In Canada, this type of loan is available through a government-sponsored program called Canada Small Business Financing Loans (CSBFL). Small businesses can borrow up to $1,000,000 with a full 85% of that amount guaranteed by the federal government. To be considered a small enough business to qualify, your entire operation's annual gross revenue needs to be less than $10 million in the year you apply.

The loans do come with a few restrictions, however. For example, you can't use a CSBFL to finance franchise fees or inventory, but you are allowed to purchase restaurant and hotel equipment with them, along with any eligible costs required to purchase your actual franchise.

Because of the considerably lower risk involved, another advantage of a CSBFL is that banks and credit unions are apt to lend you more money, with lower interest rates and better repayment terms than they'd likely otherwise approve. If you have the credit score and track record required to secure one, a loan sponsored through the federal government’s Canada Small Business Financing Program may very well be your best financing option.

But there's a caveat. The process to secure this type of loan is typically long, often convoluted, and the qualification standards prohibitively stringent. As such, you would be wise to carefully consider your chances of getting one before subjecting yourself to the arduous application process. You could easily find yourself jumping through endless hoops just to emerge frustrated, and certainly none the better for the experience.

Government grants and the BDC

Another excellent source of financing is the Business Development Bank of Canada (BDC), a Crown corporation that operates at arm's length from the federal government. The BDC focuses on small and medium-sized businesses and is mandated to “create and develop strong Canadian businesses through financing, advisory services and capital.”

The BDC offers a wide variety of loans, grants and other financing options to both seasoned and new entrepreneurs, all featuring very favourable terms and limited personal risk. Some of their programs are also targeted at specific demographic groups, such as indigenous Canadians, recent immigrants, and women developing or marketing certain “cleantech” options.

Alternative lenders

If you lack the requisite credentials to secure funding from a conventional lender, there are always alternative lenders you can turn to.

As a rule, these lenders have less stringent requirements and offer shorter turnarounds than traditional financing options. Alternative lenders are also far more flexible than banks and credit unions with respect to rates and repayment terms.

Plus, there are potential tax savings to be had with this source of financing, and the entire borrowing process is almost always simpler and quicker than applying to a bank for funding. The advantages associated with these loans can be significant, and as such should definitely not be overlooked.

Our experts can help you secure the funding you need for your franchise purchase. Contact us to find out more.