What is meant by franchise?
A franchise is a great solution for people to run their own business using the identity of a well-known brand legally. In this setup, the company that owns the brand, called the franchisor, allows another person, the franchisee, to use its name, products, infrastructure, branding, suppliers, goodwill and business methods.
In exchange, the franchisee pays an initial fee to acquire the franchise and regular payments called royalties. This arrangement helps the franchisee because they get to use a brand that many people already recognize. The franchisor usually provides support like training, marketing, and advice on how to run the business. Franchisee has to manage the day-to-day operations of the franchise.
You can see franchises in various shapes and forms, like fast-food restaurants, retail shops, and service companies.
The prospect of becoming a franchise is a dream come reality for entrepreneurs. It gives them the flexibility of small business and the infrastructure of a large enterprise. Everything right from infrastructure, branding, suppliers, to even goodwill of an established brand can be leveraged. Some of them are determined; they do their homework and are ready to move. Unfortunately, most of them draw back when it comes to funding the venture. No average businessman will ever have that money. The expenses involved in launching a new franchise include the following:
- Royalties : This is a fixed profit sharing arrangement, where the franchisee gives money to the brand owner to use their brand and resources like suppliers, infrastructure, goodwill, etc.
- Funding for inventory : Although infrastructure, and goodwill is something that comes with getting a franchise, to sustain or even start the operations, usually a high amount of inventory is needed which requires a heavy funding. This is one of the main constraints with regards to expenses when it comes to running a franchise.
- Working capital : On an ongoing basis, any business requires some level of working capital to function efficiently. With franchise business, since the franchisee has an advantage of a well established brand, it also comes with a high working capital requirement. Franchise owners should always have enough liquidity in the business to sustain the business operations.
Apart from product distribution franchise, and manufacturing franchise, the franchises that are there in service too will need lots of money to launch new products or services. Fortunately, franchise finance sources are there in plenty. All you need is the following guide to determine your options and act accordingly.
Availing a franchise business loan in India
Companies that offer franchise business loans abound in number. However, you have to make sure that you are prepared enough for a lengthy process. And the first step toward this is to calculate your net worth, evaluate it by calculating your assets and liabilities, take a balance sheet and list all your assets, real estate, saving-checking accounts, direct cash available, automobiles, insurance protection, bonds-securities and other assets. Calculate their values and total them. Next comes the liabilities. Calculate the bills to be paid, auto loans, property mortgage, loans from financial institutions and other dues. Total these. Done this, subtract your liabilities from your assets to calculate your current networth.
Set this aside and evaluate your credit rating. Three important factors come into play here; your financial backup, stability, and your track record. Franchise companies in India and all over the world will be keen to know the following facts about you:
- The time period you have stayed in a particular location.
- How long you were in a certain position in your job.
- Your stability: if you are motivated enough to finish what you start.
If your record is not stable enough, brace yourself for a challenging time ahead. Your choice franchise business financing lender will want to know if you are capable of managing your personal finances. There are people who earn $200000 a year and they will always remain debtors. Some others earn just $25000 a year and will never have even a single debt. If you fall in the second category, you present yourself as someone incapable of managing a business.
The next factor that comes to play in your chance for a loan for a franchise in India is your credit report. Are you someone who pays off your debts at the earliest? Your choice franchise finance India lender will contact all major credit agencies to know your credit score. Make sure that you are prepared well for the process. Credit agencies are legally required to give you every single detail with regard to your credit score. Correct wrong information and pay off all your other debts.
Upon completing the analysis mentioned above, proceed with the tips given below:
1. Take care of the flow of cash
Know that the price of a franchise does not include the capital you need to get it operational. As a result, the entrepreneur experiences a financial emergency with regards to maintaining enough liquidity and working capital requirement for the franchise to run smoothly. Make sure that your choice franchise business financing company lets you borrow the working capital you need. You should also be able to postpone the payment of the principle amount until your business gets on track.
2. Prepare a franchise business plan
This is the first thing institutions offering small business loans for franchises require when evaluating a loan application and preparing the same is just a breeze. Visit your franchiser’s website and download the form from there. Make sure that it describes the following:
- Personal details: your contact information, marital status and other details you consider relevant
- Explain your work experience and skills. Tell your lender how you plan to make your venture a success.
- Present an outline of your business: your market, the customer base and an analysis of your competition
- Information on your business: The premises, equipment and other details
- Introduce your management team: Explain important roles and who are filling them
- The marketing strategy you want to deploy: The ways you plan to draw, customers and maintain them and all about your ad campaigns
- How much you need as loan
- Working capital: Your invest in the venture
- Your personal financial status: Details of your bank account, your assets and the flow of cash.
3. Discuss with your franchiser
If you need franchise business financing, your first point of contact should be your own franchiser. Almost all reputed franchisers offer financing programs designed exclusively for their franchisees. Some may do it from their own funding. Others may collaborate with other lenders for the purpose. Whatever is the choice, your franchiser is the best source of funding you can have.
Adopting this option offers you numerous benefits. The most important among them is customized lending. Your franchiser may not only finance your franchise purchase, but also the equipment you need. Besides, they know the ins and outs of the business. And they are fully aware of the risk you take.
The franchise business financing agreement may differ depending on the type of franchise you choose. Certain companies may bear up to 75% burden if yours is a new venture. Others may frame the repayment structure on a sliding scale. Some even defer payments until you are able to go up and running. Contact your business attorney and take an informed decision in this regard.
4. Small business loans for a franchise from commercial banks
Credit unions and commercial banks too offer franchise business financing. However, the process of documentation may test your patience. Your choice institution will study both your personal and business credit scores. If you don’t have a stable track record, you are in for a tough time. Certain banks may even require you to submit collateral. You will have to pledge either your home or your business assets. If not, they may ask you to pay up to 25% of the upfront value.
Apply for Franchise Finance Now
Why choose Lendingkart!
Planning to apply for Franchise financing? Try Lendingkart because we offer:
- Quick application and disbursal process – Application and disbursement process on LendingKart is quick and hassle free to ensure quick financing so that your financing requirements are met quickly!
- Flixible loan amount, repayment methods and loan tenure
- Mortage free finance
- Interest rates designed exclusively for SMEs – We at LendingKart understand the challenges with setting up a business and financing, hence we offer interest rates designed exclusively for small and medium enterprises!
Franchise Finance FAQs:
1. Why lenders prefer bi-weekly payments?
Fortnightly payments fast-tracks the repayment process. You are able to repay your loan fast. This opens up your credit line/eligibility for future loans that you may require for expansion or for working capital requirement, it also improves your credit rating.
2. How much is the pre-closure charge at LendingKart?
Pre-closure charges apply as per the lender’s policy, and the request can be made after paying the first EMI in full.
3. Is it possible to get a business loan with a low credit rating?
Risk and rewards are proportional, low credit rating indicates high risk to the lenders, hence the interest component also increases. It is possible to get debt funding with low credit ratings. But the interest rates may sky-rocket. It is highly recommended that you improve your credit rating before applying for business loans.
4. How does LendingKart offer this low interest rate?
We are a highly efficient and data-driven organization. We do everything online. It lets us pass the savings on to our customers in the form of lower interest rates.
5. What are the minimum and maximum loan amounts that can be availed of?
The minimum and maximum loan amounts for franchise capital funding or franchise expansion funding vary depending on the lender and the specific franchise funding solutions offered. Loan eligibility and requirements, as well as interest rates, are determined by individual lenders, so it’s advisable to inquire directly with potential lenders for precise details.
6. Do I need to provide collateral or personal guarantees to secure the loan?
Franchise capital funding typically requires collateral or personal guarantees to secure the loan since these are risky assets for the lenders. Lenders offering franchise expansion funding or franchise funding solutions often assess franchise loan eligibility based on creditworthiness and financial stability. Rates and requirements may vary, but collateral and guarantees are common practices to mitigate risk.
7. How long does it typically take to process and disburse the loan?
The time it takes to process and disburse franchise capital funding, also known as franchise expansion funding, varies based on franchise loan eligibility and requirements. Typically, it can range from a few weeks to a few months. Rates are influenced by creditworthiness and the chosen franchise funding solutions.
Summary
Starting a franchise can be costly for a person who is starting on their business journey. Franchisees must pay for royalties to the franchisors, and make provisions for inventory, and working capital on an ongoing basis. These costs can be a huge challenge for a new business owner.
There are different types of franchises, including product distribution franchise, manufacturing franchise, and service franchises. Each type of franchise needs different amounts of money to become operational. To get funding, potential franchisees should first check their net worth, they can do this by making a fair assessment of their assets and liabilities. It’s also important to know their credit score, as lenders would want to know if they are financially responsible and capable enough to repay the loan they’re applying for.
Having a solid business plan is key when asking for a business loan for franchise. This plan should explain the franchise, the product, the market, the earning expectations, and how much money is required. Talking to the franchisor about funding options can also help, as many franchisors offer financing options to assist the new owners to set up their franchise.
Apart from the franchisor support, banks and credit companies can also provide loans, but this process can be really time consuming and may need collateral to back the loan repayment. Companies like Lendingkart offer flexible loans made for franchise owners, making it easier to get the money needed to start a successful business.
NOTE: No processing fees are being charged by Lendingkart before disbursement of the loan amount. Any individual claiming otherwise must not be entertained. Please report such activity on 