Franchise financing: Can I afford the franchise?
My question is about franchise financing, liquidity and net worth. If I have the liquid cash to start with, but not the net worth, what do I do?
Financing ability & available cash
Good question and one that is often confusing for those entering the franchise industry. Most franchisors state their requirements for liquid assets (or cash required) plus total net worth. They’re simple parameters for prospects to self-qualify their ability to purchase the franchise. And of course, franchisors will sort out a prospect’s financial qualifications immediately so as not to waste valuable sales efforts. Simply put, they want to know if their sales efforts can possibly be rewarded candidate by candidate.
As you most likely understand, ones ability to obtain financing is generally a function of net worth and credit worthiness. Net worth, of course, is the total of all assets minus debt. Franchisors will consider your cash (or total liquid assets) as important to cover the costs of franchise fees, initial payments, training expenses, working capital and living expenses. Your net worth represents your ‘borrowing power to cover the balance of the purchase such as equipment, leases, build-outs. Check with your banker for a more in depth explanation, but first, figure out what kind of business you want to be in. Making that determination at the outset will go a long way toward helping you assess your franchise financing options and figuring out how to proceed with your business plans. You may find that you have enough cash on hand to pay for certain franchises without financing considerations.
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