Every business requires financing. Whether this comes from internal bootstrapping, taking out a business loan with a bank, or working with a venture capitalist (VC), money is always a factor in the business equation. The franchise industry is an area of business that offers many critical financial lessons for businesses, regardless of their size and stage of growth. Often, business owners can replicate the principles and strategies that make franchises successful and adapt them to other kinds of business structures to fund expansion, manage cash flow, and mitigate financial risks.
Whether you’re looking to finance a new venture or scale an existing one, this article will give you three key franchising financial strategies you can use to navigate the complex world of business financing.
1. Consider Your Financing Options
There are many financing options in the business world. For instance, a small business can:
- Use a bank loan: This allows you to borrow a specific amount of money to start a business, launch a product, and expand into a new market. It works best when you have a clear vision with specific needs.
- Work with a third-party investor: Venture capitalists and angel investors are common financing options. They typically exchange capital for equity, which can be a great way to build a financial buffer that gives a business a longer runway to grow.
- Grants and Small Business Administration loans: Grants and SBA loans can provide cash infusions guaranteed at low interest rates or, in the case of a grant, that don’t need to be repaid.
The franchise industry has shown the breadth of diversity available for financing options. As a business grows, it can run into an endless variety of different financing needs. It’s important to consider all of your options before making a decision.
Brian Cook, franchisor of Get in Shape for Women, adds that you want to look at the fine print and watch out for hidden costs. Both sides in a transaction should be willing to prioritize transparency and honesty.
The serial franchiser also suggests thoroughly investigating “all financial aspects” of each financial agreement. In the case of a franchise, this might pertain to expectations over franchise speed of growth. For a startup, it could be hitting certain benchmarks or achieving profitability.
Whatever the case, as a business owner, always consider your options thoroughly and the expectations that each agreement creates.
2. Build Strong Relationships With Lenders
As APG Federal Credit Union puts it, a lender is the “gatekeeper” of the capital required to help a business start, maintain, and grow. The lender is responsible for assessing the creditworthiness of a potential borrower, and they cannot take that burden lightly.
This makes your relationship with your lender an essential aspect of your ongoing business. A relationship of this nature doesn’t develop overnight or due to a pleasant conversation. It requires an ongoing commitment to responsibility.
franchisee, for instance, might be able to lean on the reputation of a larger chain to gain initial access to funding. However, they are individually responsible for maintaining payments on time. They must build rapport with the lender through thorough, open, and honest communication, too.
The same goes for a small business owner. Once they get their funding, they must invest in a strong relationship with the lender or lenders that they are working with.
As a business owner, make sure you are treating your lenders as more than a cold and calculated business transaction. Yes, that is the basic function of the relationship, but it is a relationship all the same — invest in it.
3. Structure Sustainable Deals
One of the hardest things about business financing is understanding your future capabilities. As a borrower, you need to set things up in a way that you can manage in six months, a few years, and a decade from now.
Adding more complexity is the fact that, even if you’re successful, you may need to keep some of your finances freed up to fuel growth. The way you structure your financial deals can do more than help you launch or grow your business now. It can help you sustain that growth in the future.
Franchises are intimately familiar with growth, both on a startup and region-wide basis. Byline Bank emphasizes that structuring a loan is a vital part of this process. The group points out that, in some cases, a traditional commercial loan will suffice. However, an SBA loan can be more suitable if an enterprise has lower up-front value (as is often the case with an individual growing business, too).
The takeaway? Structure your loans based on your future as well as your present plans. What stage of growth are you in? Do you need to keep cash flow and capital available for planned growth? Don’t cash-strap your enterprise through poor loan structures in your eagerness to access financing in the first place.
Using Franchise Industry Lessons to Finance Your Small Business
Financing your business is a critical part of ongoing success. Use the examples of successful businesses in the franchise industry to make sure your own monetary activity is healthy. Consider your options in detail. Build strong relationships. Structure financial deals sustainably.
If you can do that, you can set up a business of any size and in any stage of growth for a successful future.
