Debt financing includes bank loans, bond issuance and notes payable, accounts payable, etc. The latter mainly refers to equity financing. Debt financing constitutes a liability, the enterprise has to repay the agreed principal and interest on a regular basis, and creditors generally do not participate in the business decision-making of the enterprise, and do not have the right to make decisions on the use of funds.
Debt financing can be divided into working capital financing and capital expenditure financing, which has the advantage of borrowing funds and repaying them to the creditor at the appropriate time when there is the ability to repay. The main sources of debt financing are friends, banks and other financial institutions. Working capital liability financing (current assets - current liabilities), which generally involves borrowing short-term liabilities and purchasing inventory to pay accounts payable, is often appropriate and necessary if the franchisor must achieve higher sales and profits by increasing inventory and giving employees raises.
Working capital debt financing is typically obtained from bank loans, commercial credit unions, or credit unions, and it is short-term. Capital expenditure financing (land, buildings, equipment and fixed assets), is obtained by contracting long-term debt. Capital expenditure financing is particularly important when a franchised business initiates market expansion or reorganization. The primary sources of capital expenditure financing are commercial banks, venture capital, manufacturers, life insurance companies and other commercial lenders. Debt financing is usually available in the form of bank loans, equity financing, debtā financing and finance leases. More suitable for debt financing for current domestic concessionaires are bank term (pledge) loans and finance leases. The franchisor can obtain the funds needed to improve operations or expand markets depending on the type and requirements.
1. Bank term loans
Banks are the most important financing channel for franchised enterprises. According to the nature of the funds, it can be divided into three categories: working capital loans, fixed asset loans and special loans. Specialized loans usually have a specific purpose, and their lending rates are generally more favorable. The loans are divided into credit loans, secured loans and bill discounting. Among these, term (pledge) loans are a formal contract between a bank and a franchisee, agreeing that the franchisee will utilize a certain amount of capital (principal) for a specific period of time (the term of the loan) and pay a set percentage of interest. Such loans generally require partial monthly repayment of principal and interest or allow payments to be made on a loan repayment basis, i.e., only a portion of the principal is repaid over the life of the loan, and a larger sum is repaid at maturity. Typically, this type of loan generally requires collateral (land, construction real estate, equipment, or other fixed assets), which will be seized by the bank if the franchisee fails to make the required loan repayments.
2. Financial Leasing
Financial leasing, also known as financial leasing, is a new mode of operation for product marketing and asset management, as well as a way of asset-based capital financing. It is a kind of loan relationship between ownership and right of use, that is, the lessor (owner) will lease the leased property to the lessee (user) within a certain period of time, and the lessee will pay a certain amount of leasing fee in installments according to the provisions of the lease agreement, and obtain the ownership of the leased property at the end of the term. Financial leasing is actually a form of financing to achieve the purpose of financing. For small and medium-sized franchising enterprises, financial leasing is a combination of financing and financing, which integrates trade, finance and leasing, and its operation is relatively flexible and simple, and it is a very effective way of financing to improve the financing efficiency of enterprises. Frequently used business leasing, financial leasing or installment payment, sale and leaseback.
Equity financing is to sell the ownership of the company to other investors, that is, the owner's interest in exchange for funds. This would involve assigning responsibility for the operation and management of the company among the partners, owners and investors. Equity financing allows the founders of a business not to have to pay back other investors in cash, but to share the profits of the business with them and assume responsibility for its management, with the investors receiving a share of the profits of the business in the form of dividends. The main sources of equity capital are own capital, friends and relatives, or venture capital firms. In order to improve operations or expand, the franchisor can utilize a variety of equity financing methods to obtain the required capital.
Venture Capital
When a growing franchisee needs additional capital to make its business plan successful, but lacks the collateral or the ability and credentials to make the principal and interest payments, or when the franchisee wants to obtain traditional debt financing from a commercial bank and the franchisee needs to prove that it can make the principal and interest payments, the franchisee may seriously consider venture capital as a source of financing for the company. The franchisor may seriously consider venture capital as one of the sources of financing for the company. However, the franchisor needs to face the reality that it may be more difficult for the franchisor to obtain debt financing because the franchisor needs capital to cover its "soft costs", including personnel and marketing costs. However, as franchising has become a successful business model for domestic enterprises, more and more private investors and venture capital organizations are willing to provide capital to franchisors. For example, the domestic hot pot restaurant chain brand Little Sheep and the budget hotel chain brand Ruijia just received funding from venture capital organizations in 2006.
However, venture funds are also very demanding, and they are always looking for entrepreneurs who are enterprising, have a positive life and business style, and are full of enterprising spirit.
In addition, venture funds often require a certain amount of equity in the franchised business, participation in the board of directors, and a detailed report from the franchisor setting out the business development plan, financial planning, product features, and management's capabilities. In terms of equity structure, it also requires that the management of the enterprise must invest a certain percentage of capital, usually around 25#M~T^02, to constrain the management's commitment to the enterprise.
2. Partnership
This is one of the common channels used by franchisors to raise capital in the early stages of development. A prerequisite for the formation of a partnership is that the partners are willing to work together and agree to put up a certain amount of initial capital for anticipated expenses. When the property of the partnership is insufficient to satisfy its debts as they fall due, each partner shall be liable but unlimitedly jointly and severally; each partner shall have the same rights to carry out the affairs of the partnership. In this form of partnership, according to the Partnership Law, the partnership can only be established as an unlimited partnership, and all partners must assume unlimited liability for the partnership, so that all partners can only be jointly and severally liable for the debts of the partnership as general partners, unless they do not invest or intervene in other economic activities. According to the regulations, business decisions are subject to the consent of all partners. Any general partner can become a franchisee of the franchise system. All partners are fully responsible for all the debts of the business and undertake to participate actively in the management of the business and to pay taxes on the profits earned, respectively.
Another type of partnership is the limited partnership. The limited partners are only liable for the debts of the business to the extent of their investment or the agreed risks, with the benefit of sharing in the profits of the business and enjoying personal tax benefits. If the limited partner does participate in the management of the business, the partner converts to a general partner.