Financing Your Franchised Business

 Primary goal of any company is to gain profit and

increase personal wealth.
 For owners to their increase wealth is to increase
the value of business.
 Profitability is very important:
a) Growth
b) Sound investment
c) Financial stability
d) Good management
 Financial obligation of Franchisee
• Opening involves several important financial
considerations, particularly start-up costs.
• Start-up cost include building expenses (land, building,
equipment, fixture, decorating, remodeling)
• Salaries and wages
• Inventory
• Advertising costs
• Business expenses ( telephone and utilities, insurance,
legal, other professional fees, vehicles, supplies, licenses)
• Living expenses ( salary of owner or manager)
 Franchisee is also required to pay the franchisor
several fees

• Franchising fees
• Royalty fees (3 to 7 percent of gross revenues)
• Advertising fees (.05 to 4 percent of gross
revenues)
• Training fees (travel, lodging and meals)
• Others additional cost relating to on-site
visitations, computer rental fees, equipment
leasing fees, travel expenses to regional or
national franchisor meetings.
 Financial Resources of Franchisees
 Financing is defined as the acquisition of funds
to cover expenses and to allow the purchasing
of assets which provide revenue for a new
business.
 The franchise’s capital structure is the makeup
of its business finances – how much is debt
(borrowed money) and how much is equity
(owner’s share)
Equity Financing and Debt Financing
Equity Financing is selling the ownership of the
company to other investors.
• This includes dividing the business and its
managerial responsibilities among the
different partners, owners, or investors.
• The original owner does not have to repay
these other investors in cash, but instead gives
them a share of the business profits and
managerial responsibilities.
• The investors receive money from the business
through the division of profits in the form of
dividends.
• Debt Financing is divided into two categories:
 Financing for working capital
 Financing for capital expenditures
Advantage of debt financing
 It enables one to borrow money and pay it back
to the lender over time, on an appropriate,
affordable repayment schedule.
Major sources of Debt Financing:
 Banks
 Friends and relatives
 Financial institutions
Debt financing for working capital
(current assets – current liabilities) involves short-
term debt incurred to help purchase inventories or
cover accounts payable.
Working capital debt is financed through short-term
bank loans, trade credits or credit unions.
• Financing for working capital is normally short-
term financing for capital expenditures
(land, building, equipment, and fixtures)
• Capital expenditure financing is most often
required for start-up expansion or for
remodeling of the franchise.
• Major source of capital expenditure financing
include commercial banks, small business
administration, venture capitalist, vendors, life
insurance companies, other commercial lenders.
 Franchisee must understand the Five C’s
of Debt Financing
• CAPACITY – ability to pay the loan
• CHARACTER – personal attributes of the applicant
• CAPITAL – personal financial strength – the net
worth of the business
• COLLATERAL – assets pledged against the loan
amount
• CONDITIONS – general economic climate at the
time of the loan
• The owner’s ability to obtain the money is
going to be based on personal history, credit
history, business track record, and ability to
effectively influence the lender.
 Debt Financing
• The capital structure of the Franchise may
include:
a) Short-term financing involves the use of
money for less than one year. These funds
are often sought for needs such as the
purchase of inventory or specialty sales
items. The franchisee may usually secure this
type of financing through trade credit,
commercial paper, unsecured bank loans,
inventory financing
• Trade credit – the franchisee can receive credit
from suppliers and or service companies. The
supplier (seller) generally allows the
franchisee (buyer) a certain number of days
before the bill must be paid. The trade period
may be 30 to 120 days, with little or no
interest charged for this period. Franchisee
ability to obtain trade credit is determined
solely by their reputation and credit history.
• Commercial paper – short-term promissory
note which the franchisee signs and sells to
investor. It is normally sold for short period.,
from 30 to 270 days. Because it is very difficult
for most franchisees to afford, this practice is
ordinarily reserved for large corporations with
strong financial backing.
b) Intermediate-term financing – used to meet a
firm’s 1-3 year financing requirements. This type of
financing is normally quite flexible and is frequently
used by franchisees under going rapid growth.
o The company may initially seek short-term
financing which the bank may extend for a 1 or 3
year period, but the bank is usually willing to give
additional extensions.
o Many franchisee look to intermediate-term
financing as a way to obtain funds for starting up
or for limited expansion.
• If the franchisee has a strong credit rating, the
bank may provide an unsecured or signature
loan. This type of bank loan may be a certain
line of credit, a revolving credit agreement, or
a transaction loan. Or a franchisee may be
able to obtain an inventory loan based on
inventory on hand. Banks in this case require
the franchisee to actually present the
purchase order and an audited account of
inventory on hand.
c. Long-term financing – used to provide funds
for the purchase of permanent assets, which
may include land, buildings, and equipment.
Long-term financing involved a period of 5-20
years. These arrangements are typically handled
not by banks but by institutions as insurance
companies, pension funds or small business
administration, or by the issuance of bonds or
stocks.
 Types of Debt Financing
Franchisees can utilize several types of debt financing
when they are in need of capital to improve or expand
their business.
a. Bank term loans – a term loan is a formal agreement
between a bank and the franchisee for the use of a
specific sum of money (principal) at a given interest rate
for a specific period of time (term).
b. Equipment lease financing – this agreement enables
the franchisee to obtain equipment at lower cost,
eliminate risk of ownership, and obtain service and
maintenance agreements from the lessor ( company
that leases property).