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Banks often favour lending to franchise hopefuls

Written by : Stefania Moretti
Raising enough capital to start your own business can be an up-hill climb, especially given today’s cautious lending environment.

Opening a franchise might be the easiest way to do it as banks swing available credit in favour of proposals backed by a proven track record instead of gambling on a startup.

Franchising is a business model whereby a company or individual (franchisor) licenses the right to use a trademark, brand and operating system for a fee to a franchisee.
Franchised business accounts for 40% of all retail sales, or $90 billion per year, and 10% of Canada’s Gross Domestic Product, according to the Canadian Franchise Association.

David Wilton, director of small business at Scotiabank, said loan applications supported by strong business plans and solid credit ratings typically stand the best chance.

Lorraine McLachlan, CFA president and chief executive, said the internal statistics of the banks she’s spoken to show creditors often choose franchisees because of proven management histories and higher chances of success.

That’s good news for franchise hopefuls who need all the resources they can muster.

Earlier this month, Bank of Canada Deputy Governor Pierre Duguay warned small businesses could experience “some modest further tightening” in available credit.

The cost of opening what’s arguably Canada’s most famous franchise, Tim Hortons, ranges from $430,000 to $480,000. At least $144,000 of that must be in cash or liquid assets from the word go.

Demand for franchises remained strong even through the height of the financial meltdown, McLachlan said.

“The recession created the desire within people to control their own future…their own finances,” she said.

According to the CFA’s annual directory, the top five franchise growth categories are seniors and home, business consulting, retail, health/fitness & nutrition and food.

Waiting lists for the most popular franchises can be long, but you can bump yourself up on that list if you are willing to relocate to areas the company has outlined as desirable.

The CFA’s next Franchise Show runs this weekend at the Toronto Congress Centre.

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