Existing Franchisees

How does liquidity impact my franchise growth?

Liquidity, or having funds on hand that can be quickly accessed, is essential to your franchise business growth, particularly in the first year. This is especially true if the brand you plan to franchise has a business model geared toward rapid expansion.

It's also a vital component of your ability to access franchise business loans.

"When we evaluate borrowers, besides the brand and experience, the franchisee's liquidity is probably the most important characteristic we look at," says Jon Kilpatrick, franchise finance specialist at ApplePie Capital.

Liquidity requirements

Liquidity requirements may differ based on the lender and loan product, but what a lender requires is only one component to consider in regards to your liquidity. You'll also want to ensure you have enough money on hand to cover the initial expenses that come with opening and ramping up a business.

"If early operators are relying on the franchise disclosure document (FDD), they'll see a range of costs required to open a unit," Jon says. "But that might not feature all the information. A lot of things can happen. Sometimes a contractor is more expensive. Sometimes a buildout takes longer than expected."

Imagine you estimate it will cost half a million dollars to open up your first franchise unit. You have $150,000 worth of liquidity, put down $100,000 as a down payment, and take out a loan for $400,000 to cover the rest. If costs in the initial months are more than $50,000, where will the extra money come from to cover them?

If your liquidity is used up, and your business is not yet profitable, obtaining another loan to handle cost overages will be difficult.