Many people buying a franchise opportunity or starting a business for the first time raise funds by getting a second mortgage on their property. This method is extremely popular due to the fact that it is possible to raise funds at exceptionally favourable terms. The interest rates are the lowest in the market and you can spread payments over many years.
Many people turn to their family and friends to either provide funds. The benefit of getting loans from friends and family is that often there is no arrangement fee and interest is usually waived. The problem with this is that if you fail for whatever reason chances are you will also lose a friend and bring financial pressures to bear to someone close to you!
If people are trying to raise money from the banks and they do not have a decent credit score they can often overcome this by getting personal guarantees from people close to them. Banks now know that if there is a problem getting repaid they can chase the guarantor for sums outstanding. Again this method carries the risk of bring you into disrepute with someone close to you.
One of the benefits of buying a franchise versus starting a business on your own is that many lending institutions look more favourably at lending for franchises. The reason for this is that franchisees have a much better track record of repaying monies due then people starting their own business. The majority of franchisees are still trading after five years where as the majority of people who choose to go it alone fail!
Usually, banks will lend fifty percent of funds required for a new start up whereas they can lend up to seventy percent for people considering a franchise. Many banks have already analysed the franchises prior to the approach for funds. They know as much about the franchise as the potential franchisee and in many cases have carried out more due diligence.
Many banks have franchise managers who specialise in assisting prospective franchisees. They have already prepared guidelines to assist and advice them. They have also been trained to examine new franchise opportunities and can point out the potential and downfalls of the type of business that is being considered.
Franchise managers can assist with the creation of business plans and forecasts. They will also help in analysing the franchise fee and ongoing royalty payments. On average, royalty payments vary between ten and fifteen percent of turnover.
Usually this advice is free and fees are only payable once funds have been approved. The recommendations they give are invaluable and based on many years of experience lending monies to franchisees. Be wary of lending institutions which insist on a charge just to examine your case.
Even if the funds are present to buy the franchise, it is still a good idea to approach the banks and see how they feel about the franchise that you are considering purchasing. At this point it is probably not the time to let them know of your financial situation!
Always base your choice of a franchise, not only with regards to the money making potential but also your lifestyle. It is important to find a business opportunity that you can commit to for many years!
Naz Daud is the founder of CityLocal. This Business Franchise Opportunity is for people who would like to work from home and be their own boss.
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