A Complete Path Over Which Electricity Will Flow Is Called Understanding Working Capital Financing Options For Franchises

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Understanding Working Capital Financing Options For Franchises

One of the oldest sayings about starting and running a franchise is the answer to a common question; “What are the three most important aspects of a successful business?” and that answer is – “location, location, location.”

Which is great when you’re just starting out and want to make sure that your business – your franchise – is located where most of your potential customers are (or where they’re most likely to find your business).

However, once you find the perfect location, launch your business, and attract all those potential consumers to your business – then what? How do you ensure that your company can serve them all – that it can make them happy and satisfied with your products or services?

Starting a business in the perfect location is a great first start – but it’s only the beginning. Once your business is up and running, that’s when the hard work really begins.

A retail franchise must not only ensure that it has inventory on hand to meet customer needs, but must also constantly reinvent its inventory mix to meet the expectations of those same customers – bringing them back again and again.

A service franchise business must not only offer services that customers are willing to pay for (not just do-it-yourself), but must have the inventory and manpower to meet that demand and be flexible enough to serve the individual needs of each customer at any level of demand.

A retail manufacturer must ensure a ready and constant supply of raw materials to meet the demand for its products – whether that demand rises or falls.

Essentially, this means that the franchise must ensure that its business is flexible enough to overcome and ultimately meet all customer needs.

However, how this is done begs another question; “What are the three most important aspects jogging successful business?” and the answer is – “working capital, working capital, working capital.”

What is working capital?

Working capital is essentially the lifeblood of a business – any business including franchises. If you compare your business to a vehicle (car, truck, motorcycle, heavy goods vehicle, etc.), it’s one thing to buy or own a car, it’s another thing to get that vehicle on the road – getting you from point “A” to point “B” “. To do this, you need some form of fuel – gas, diesel, electricity, biofuels, etc. Without that fuel, your vehicle will just sit and gather dust.

In business, in order for your business to run efficiently, you need to fuel it – in the form of working capital – to get it from point “A” to point “B” or from start-up to growth or growth to expansion or expansion to success.

Working capital can come in many forms from the acquisition (financing or procurement) of supplies or raw materials to the acquisition or possession of cash to pay for necessary labor, utilities and even rent.

Imagine that a franchise (let’s call it “Anytime Tools and Machinery”) brings in a new, large customer who wants to buy a million dollars worth of services (providing tools and machinery for large construction projects) – but they don’t have enough of those tools and machines on hand for this job and cannot afford to immediately acquire more to complete the job – which would require about $100,000 in additional rental or leasing equipment. The franchise cannot knowingly agree to that deal and therefore that buyer takes that million dollars elsewhere.

Or, a residential blinds franchise is awarded a contract to install blinds and shades in a newly constructed apartment complex to be completed in the next 30 days, but will not be paid for the work for another 60 days when the apartment complex completes its closing work. However, the franchise has to turn down this $250,000 job because it doesn’t have or can’t afford the labor needed to complete the installation in the next 30 days (because that new labor will have to—by law—be paid before the 60-day apartment closing and subsequent payment franchise service).

Since the beginning of time, businesses have faced a lack of working capital that has essentially destroyed their businesses. These companies were doing everything right until that fatal point. They brought customers to their companies and provided the products or services that those customers wanted. However, due to poor working capital management, they get more customers than they have the capital to service and are forced to turn away those patrons – not only losing business but creating a negative impression in the community that keeps other, new customers at bay (not to mention the company that agrees to a job or an order and cannot fulfill it and is therefore sued to death).

How franchisees finance working capital needs

1) Traditional business loans. Banks have a great financing program for franchise businesses. But when it comes to working capital, the best product they offer is their revolving lines of credit – either secured by the company’s financial assets such as accounts receivable or inventory or unsecured focused only on operating income or cash flow.

Either way, these commercial lines of credit work like major credit cards (without the super high interest rates). So your company can establish a line of credit that it can draw on when needed, meet working capital needs to complete a deal or sale, then with the proceeds of that order pay back the line and do it all over again when needed – the key to lines of credit is that you have to use only when you want to use them and pay (interest) only on what you use (except the annual fee).

If your franchise can qualify, a bank line of credit is your best working capital option today.

According to the SBA Office of Advocacy;

How are franchises financed?

Existing employer franchises finance expansion using the same financial tools as other businesses, but startup franchises are more likely to use a commercial bank loan. (37.8 percent of franchises vs. 23.1 percent of all employer startups used a bank loan.)”

And it’s not just banks that provide working capital options like some credit unions do, but also the Small Business Administration (SBA) which can guarantee these lines of credit under its 7(a) loan program.

2) Alternative business lenders. Working capital is what most alternative lenders do—anything to provide your franchise with the operating capital it needs from inventory, materials, labor, or whatever it takes to operate.

There are basically 3 types of alternative working capital loans:

Accounts receivable factoring: Many times companies that invoice their customers for payment have to wait for those customers to pay – sometimes 30 days, 60 days or more. But those same companies face capital challenges of their own, such as paying employees, buying additional inventory or supplies, or starting the next job or order—but don’t have the cash on hand to do so until those invoiced customers pay.

However, accounts receivable factoring companies will advance up to 90% of these outstanding invoice amounts to keep your business moving forward. Then, when your clients pay, you return the advance, keeping the remaining 10% – minus the factoring fee.

Purchase order financing: Remember our “Anytime Tools and Machinery” franchise that needed capital to obtain – let’s say borrow or lease – machinery to complete a huge $1 million job, but there was no way to do it.

Well, that franchise could still sign that job order and then take it to the PO financing company and receive the required $100,000 – a full 100% of what it takes to complete that job.

Then, when the job was done and the franchise paid, she could pay the financing company $100,000 up front and a small financing fee and not lose out on that very profitable business.

Cash advances: Let’s say a retail franchise has already purchased inventory to sell during the upcoming summer season – placing and paying for those orders months in advance to ensure suppliers fulfill their orders on time.

However, a few days before the start of the summer season – after the company has already spent its current allocated working capital on its inventory, but before it can sell any of those products for revenue – a new fade (for its market) becomes a national frenzy – makes the competition scramble to get products for his new fad.

Yet without additional working capital or a way to get it, this business will lose out on this fade and the profits that come with the high impulse and emotional consumer purchases that follow these frenzies.

Now this franchise has no accounts receivable or purchase orders on hand because its consumers are not making large upfront purchases.

But since the company generates revenue from month to month – it can receive a cash advance for future sales – then use that advance to buy new fade products.

Then, as it sells those products over the next few months, the financing company will simply take micro-payments – usually daily – from those sales until the advance is paid in full – plus a small fee.

Here, the franchise could receive an advance against the amount of average monthly sales it earns from the customer’s credit and debit card purchases (called business or merchant cash advances) or it could receive an advance against the entire average monthly revenue (called loans or proceeds on bank statement Based Loans) – essentially solves this franchise working capital problem within days.

3) Plow Back. Now, if your only option is to use external financing for your business, then bank lines of credit or alternative financing are your best options.

However, you can – and should – manage your business and income in such a way that you can finance your own working capital needs internally.

It simply works like this: Your franchise earns, say, $20,000 in top revenue per month. However, after paying direct costs as well as overhead for salaries, marketing, and general administrative expenses, he has a net operating income (after taxes and interest) of say $7,000 to $7,000 that he would use to pay down debt, pay off investors, or simply exit the business. companies.

But, if you also know that your business needs an extra $5,000 per month to support future monthly working or operating capital needs – then why not keep that amount from the $7,000 net income and put it back into the business. It is much cheaper to do it this way – using your own money – than to face the additional costs of financing your business’s working capital needs.

The bottom line is that if you can’t get a line of credit from a bank or credit union, alternative loans can easily meet your needs — they’re faster to process and fund — but they come with higher interest rates and fees.

Conclusion

Location, location, location is the driving force that can make or break your franchise from a marketing standpoint – putting your business in the path of potential customers. But, just because you have these customers supporting your business, if you don’t have the operational means to satisfy those customers – now and keep them coming back – then your location, in the end, doesn’t really mean anything.

So if you don’t want to waste time and kill your franchise before it even has a chance to succeed, ask yourself this question; “What are three things I can do now to ensure the long-term growth and success of my franchise?”

Then, from this article you can find your answer – which is “working capital, working capital, working capital.”

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