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 business. Most franchisors offer liquid assets (or cash required) plus total net worth as simple parameters for prospects to self-qualify they ability to purchase the franchise. Financially qualifying prospective buyers is also the first consideration explored by franchisors during an initial discussion. Simply put, they want to know if they should be putting time into the sales process if a person can’t afford the purchase.
First, as you probably understand, ones ability to obtain financing (for anything) is generally a function of net worth and credit worthiness. Net worth, of course, is the total of all assets (including your cash) 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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