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Who's Money to Use when
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Financing a Franchise is totally different to building up a property portfolio where you may use other people's money.
So... Don't mortgage your house to the hilt! (unless you are absolutely convinced, adamant and stubborn) Even the most successful franchises have failures and it may be due to circumstances beyond your control. Example: a major new shopping centre opens in your territory which lures your customers away, change in legislation see your margins drastically reduced, currency fluctuations, recessions, earthquakes etc. etc.
However, very few people can carry financing a franchise for even a small business franchise from cash reserves and there are many sources of financing available: The franchiser, family, small business development concerns, banks, a sleeping partner and many more. Your franchiser should be able to offer advice in this regard. For example:
NasbicFranchise Finance
The question is, whether the small business franchise can generate enough profit to provide a handsome living as well as repaying the financier.
A sleeping partner or investment from a family member may seem like a match made in heaven. Be Careful! Many small business franchises can provide a handsome living for one owner, but the burden of repaying an investor may prove too much to handle. The adage "you must have money to make money" is never more applicable than in the franchise business.
If you were to start up an independent business you could take it step-by-step as far as capital layout is concerned i.e. shop fitting, point-of-sale system, advertising etc. With a franchise you do not have a choice, you have to do it all at once.
Do your sums very carefully and conservatively. A gearing of 40% debt in a country with high lending rates (11%) may just be viable whereas in another country with a lower interest rate a gearing of 60% debt may work. Remember to allow a generous amount for cash-flow when financing a franchise.
The following links will open pages in new windows where you can get still some more information on franchising:
Advantage-Disadvantage of a Franchise
Small Business Franchise - What to look out for
Buying a Franchise - The Territory and Location
Termination of a Franchise and Restraint of Trade
Before you decide on financing, you can explore the bigger franchise picture. Refer to our free Franchise Consulting page for information on:
* Disclosure Documents
* Obligations of the Franchiser
* Obligations of the Franchisee
Return from Financing a Franchise to Free Legal Documents
Calculating the risks and costs of financing a franchise is just one part of the franchise business. Extensive franchise information is supplied here, taking a critical look at all aspects of franchising.
