Franchising

Understanding Working Capital Financing Options Available to Franchises

One of the oldest sayings about franchising is that you should answer the question “What are three essential aspects of a profitable business?” That answer is “location, place, location.”

This is great if you’re just starting out, and want to make sure your business (or your franchise) is located in the most popular areas for potential customers.

But, once you have found the perfect place, launched your business, and attracted all those potential customers to your company – what then? How do you ensure your business can serve them all and keeps them satisfied with the products or services that you offer?

It is a great way to start your business, but it is just the beginning. The hard work begins once your business has been established.

Retail franchises must ensure they have the right inventory to satisfy customers’ needs. They also need to constantly reinvent their inventory mix to keep up with customer expectations.

A franchise business must offer services customers will pay for.

Retail manufacturers must ensure that raw materials are always available to satisfy their customers, regardless of whether they are in high or low demand.

This basically means that the franchise must ensure that it is flexible enough to meet all customer requirements.

The best way to do this is to ask another question: “What three aspects are most important?” RunningHow do you build a business that is successful? The answer is “working capital”, working capital, and working capital.

What is Working Capital?

Any business, franchise or not, needs to have working capital. Your business is like a vehicle. It is one thing to own or buy an automobile, but another to drive it down the road. This is possible only if you have the right fuel. Your vehicle will sit in dust if you don’t have the fuel.

You must also add fuel to your company in order for it to be efficient. This can be in the form working capital.

Working capital can take many forms, from financing or purchasing inventory to having cash on hand to pay rent or utilities to paying for labor.

Imagine a franchise, let’s call it “Any Time Tools and Machines” and a big customer who wants to purchase $1 million worth of its services (providing large-scale construction tools and machines) but doesn’t have enough tools and machines and can’t afford more. This would require additional equipment to rent or lease. The customer accepts that job, but the franchise can’t consciously consent to it.

A residential blinds installation franchise receives a contract to install blinds or shades in an apartment building. However, the work must be done within 30 days. After that, the property will close and the franchise will not be paid for the job. The franchise must decline the $250,000 job due to inability to pay the labor required to complete the installation within the 30 days. This is because the new labor will be required to be paid by law before the closing of the apartment and the subsequent payment for franchise services.

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Since the dawn of time, businesses have had to deal with shortfalls in working capital that have virtually destroyed their businesses. These businesses did everything right up until that point. They have attracted customers to their businesses and provided the services or products that they wanted. Poor working capital management means that they end up with more customers than they have capital to serve. This not only results in losing the business, but also a negative image that can be created in the community.

Franchisees’ Working Capital Finance

1. Traditional Business Loans.

Banks offer excellent financing options for franchise business. However, banks offer great financing options for franchise businesses.

Commercial lines of credit are just like large credit cards but with lower interest rates. So your business can set up a line of credit so it can access it whenever it needs it. It can also use the money to pay for its working capital.

A bank credit line is the best way to get working capital for your franchise if you are eligible.

According to the SBA Office of Advocacy

How can franchises be funded?

Existing franchises can finance expansion with the same financial tools that other businesses use, but startups are more likely than others to use a commercial loan. (36.7 percent of franchises used bank loans, compared to 23.1 percent for all startup employers).

These working capital options are not limited to banks. Credit unions as well as the Small Business Administration can offer these credit lines under their 7 (a) loan program.

2. Alternative Business Lenders.

Alternative lenders are known for providing working capital. This is to enable your franchise to purchase the inventory, materials and labor it needs.

There are basically three types of alternative loans to working capital.

Factoring ReceivablesBusinesses that invoice customers for payment often have to wait until they pay. This can be 30 days, 60 or more. These same businesses also face capital problems, such as having to pay employees or buy more inventory or supplies, or start the next job or order, but not having the funds to do so until the invoiced customers pay.

To help your business grow, accounts receivable factoring firms will advance up to 90% on outstanding invoice amounts. The advance is then paid back by you, with 10% of the balance remaining as a factoring fee.

Purchase Order Financing: Our “Any Time Tools and Machines”, franchise needed capital, either on loan or lease, to complete a $1 million-dollar job. However, they didn’t have any means of getting it.

The franchise could still have signed the job order and then transferred it to a purchase order financing firm to receive the $100,000 needed to complete the job.

After the job was finished and the franchise was paid, the company could repay the financing company for the $100,000 advance.

Cash AdvancesSuppose a retail franchise has purchased the inventory that it will sell during the summer season. It submitted and paid these orders months before to make sure that its suppliers would fulfill its orders on time.

A few days before the start of the summer season, however, after the company has spent its current allotment on inventory and before it can sell any of the products for revenue, a new fade (for the market) is created. This causes competition to scramble for products to match his new fade.

This business is going to lose out on the increased impulse and emotional consumer buying that follows these frenzies if it doesn’t have the working capital.

This franchise doesn’t have any accounts receivables or purchase orders, as its customers don’t make large advance purchases.

However, the business can still earn revenue month after month and receive a cash advance against future revenues. The advance can then be used to purchase new fade products.

The financing company will then simply take micro payments, usually daily, from these sales until the advance has been paid in full.

A franchise could get an advance on average monthly sales via customers’ credit and debit cards (called Business or Merchant Money Advances) or a loan against its entire monthly revenue (called Bank Statement loans or Revenue Based loans) to solve this franchise’s working capital problems in a matter days.

3. Plow back

Bank lines of credit, alternative financing or outside financing might be the best options if you are unable to finance your business.

But you can and should manage your operations and revenue so you can internal finance your working capital needs.

It works like this: Your franchise makes $20,000 per month in top-line revenue. It has net operating income after taxes and interest of $7,000 to $7,000, which it could use to pay down its debts, repay investors, or take the company out.

If you know your business will need an additional $5,000 per monthly to cover its future working capital and operational capital needs, then why not take that $7,000 net income and put it back into the business? It’s much cheaper to do this using your own money than to finance your business’s working capital requirements.

This means that, if you are unable to get a credit card line from a bank or credit union, you have options. Alternative loans can fill your financial needs faster but with higher interest and fees.

Conclusion

The driving force behind a franchise’s success is location. This is how you market your business and put it in front of potential clients. However, even if you have customers who patronize your business, it does not mean that your location is worth anything if you lack the operational ability to meet those customers now and keep them coming back.

If you don’t want your time to be wasted and your franchise fail before it has any chance of succeeding, then ask yourself the following question: “What three things can I do now to ensure long-term growth, and success for my franchise?”

This article will help you find the answer. It is called “working capital”, working capital, and working capital.

molw.net

We are a team of professionals with each having two decades of experience in start-ups, sales, marketing, finance, HR, large scale project and profit centre management and running mature cross functional operations. At Molw.net we are big believers that knowledge transfer is critical to our industry’s evolution. We love to share our experiences and learnings through our online resources.

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