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Franchise financing for first-time franchisees

Some potential franchise financing sources include the following:

- Personal savings and investments
- Borrowing from friends and family members
- Taking out a small business loan from a local bank or credit union
- Obtaining a second mortgage on your home
- Working with outside investors or investment capital firms
- Obtaining a loan from the U.S. Small Business Administration (SBA)
- Obtaining a loan from Canada Small Business Financing (CSBF

You must come up with the money to be in business!

The statistical truth is that the single most common reason new franchisees (and for that matter, all other types of new businesses) fail is that they did not have enough money going into the investment.

A responsible franchisor will not take on a new franchisee that does not have the appropriate financial resources to get the business off the ground and make it profitable

Determine How Much Money You Need To get Started

Opening a franchise requires a significant financial investment.

If the only benefit you received from joining a franchise system was an accurate estimate of the costs of developing the business, sources for equipment and suppliers, and the knowledge of how much working capital you needed until the business could support itself, the investment in a franchise may still be worthwhile. Because of this helpful start-up information, an experienced and mature franchise system is worth its weight in gold to a new franchisee.

An overall picture of what your start-up costs may look like

Franchisors reduce your time and costs on the learning curve. Franchising succeeds because the franchisors take care of the details you may not even think of.

Total start-up costs vary dramatically, depending on the franchise you select, varying from less than $10,000 to more than $1 million. A typical investment for a single-unit franchisee is usually in the $100,000 to $300,000 range. The franchisors disclosure document, provides you with a list of start-up expenses that will make up your initial investment

Most franchisors want to see a liquid (cash) capital investment of 35 to 50 percent of the total franchise cost (the franchise fee plus all start-up costs). They want to ensure that you have enough money, not only to get started but also to pay your bills, including any principal and interest payments on your loans.

Start-up costs may vary depending on whether you need to own or lease real estate to operate the business. Fixed-based franchises, almost always cost more than a franchise operating from a van or over the Internet.

Initial expenses you should anticipate

The franchise fee, which is the amount you pay the franchisor to offset the franchisor’s cost of locating, screening, negotiating with, and training you. It may also cover the costs involved in site selection and development, promotions, grand-opening events, and ongoing support during your first months of operation.

Franchise fees vary, depending on the franchisor. They can range from $0 (which is very unusual) to more than $100,00. The franchise fee for most franchisors is between $20,000 and $35,000. When comparison-shopping, pay particular attention to what services you will receive for your franchise fee and what other necessary services separate charges. The lowest, most appealing franchise fee may not be the best value.

As you identify a location, you will usually sign a single-unit franchise agreement. What you pay and how the franchisor applies the fee will vary, depending on the agreement.

Other start-up costs include:

Blueprints and professional fees…
Contractor fees…
Costs for finding the right location…
Décor packaging and signage…
Equipment and fixtures…
Freight and sales tax…
Improvements and construction…
Insurance…
Landscaping…
Opening inventory…
Real property and occupancy charges…
Zoning expenses…

In the disclosure document, a franchisor will provide you with a chart and notes concerning your start-up costs for that particular franchise.

John Bauer, a 20-year veteran of franchising, shares his extensive knowledge on his website http://www.whyfranchising.com. Start right. Finish successful. Here’s how.