Franchising is a business model that allows for the growth and expansion of your business through strategically placed franchise units. To establish a franchise, you must meet a franchisor’s investment requirements. These requirements vary from the franchisor to the franchisor but typically include a minimum liquid capital requirement.
There is a myriad of terms used, and it can be confusing. A commonly confusing term is “Liquid Capital.” Most people view this term as the amount of money needed to purchase the franchise. But that is not quite what it means. Liquid capital refers to a specific part of the capital – your cash assets minus business expenses and liabilities.
The franchise agreement will define liquid capital as the cash you need to enter into the contract. This should not be confused with a net worth or equity.
Net worth is your total assets minus your total liabilities. Liquid capital is your cash in the bank that you can invest right now.
The idea behind on-hand capital is that it’s ready to invest in your business. It means that you have the cash on hand, so you can use it when the time is right. It also means that you’re not borrowing money from someone to invest in your business.
If you want to buy a franchise, it is essential to understand how your franchisor defines liquid capital. In nearly all cases, franchisors define liquid capital as the cash you need on hand to enter into their agreement. Each franchisor has its liquid capital requirement level. Be sure to check the franchisor’s site to determine their Initial capital requirements and what they accept as liquid capital.
Generally, to become a franchise owner, you’ll have to have at least $60,000 in liquid capital. That’s the minimum. However, some franchises may require up to $500,000.
In the beginning, your business may be cash strapped, so it’s a good idea to save up as much liquid capital as possible for costs such as the franchise fee, deposits for utilities, first and last months lease, construction build-out, equipment leasing down payments and various other fees associated with getting a franchise work.
Not all businesses will be profitable right away, which means you’ll need to have enough money on hand to cover expenses for a few months until your franchise unit starts making a profit to cover its ongoing costs. These ongoing costs can include rent, wages, advertising, royalties, and the cost of sales.
To get a franchise, you need to have a considerable amount of money for the initial investment and the monthly fees. However, there is a way to acquire one without spending a dime! How? Well, it’s all about reading the franchise disclosure document (FDD) and understanding the business model.
Hi, this is Dan Rowe from Fransmart. Our website gives you all the details you need to start a successful franchise business. Whether you want to invest in a healthy menu Greek franchise, a fast-developing profitable sandwich franchise, franchise opportunity as a Cashpoint, or an award-winning franchise with low risk and capital, we have information on everything. We can also aid you in finding the ideal fit for your skills and experience and how to finance your new franchise.
When I think about liquid capital, I think about two things:
- how much money do you have in the bank that you can invest in a business idea, and
- how much money do you have? If you were to invest in a business idea, you would still be able to provide food for your family.
We do not recommend people borrow funds to cover the liquid capital requirements. The extra load of debt puts a burden on the income statement and the mind. It is better to wait for a more significant infusion of funds or raise equity capital by approaching investors.
The second is to ensure that the franchise in question has a large enough asset base to cover the debt. The point is if you’re going to borrow it, you better make sure you have something worth borrowing.
You must be able to afford to live if you were to lose the investment altogether. We encourage people to ensure their finances are in order before investing in a business if they have high credit card balances, an excessive debt to income ratio, or monthly obligations that are currently causing a strain on their finances.
The term liquid capital is used in the financial world to represent money, assets, or securities that can be readily converted into cash. Franchising experts have also used the term to describe the amount of money a prospective franchise owner must have available to them before buying a franchise business.
If you have less than $100,000 of liquid capital, it could be challenging to afford a franchise’s startup costs.
The Franchisor will want to ensure that the franchisee has enough cash or liquid assets to keep afloat for the start-up period. This is because it could take years before you start making money through franchises. You should have enough liquid assets to sustain operations for a few years if you buy a franchise. Franchisors prefer that their franchisees succeed with an operation as much as possible.
The FTC requires franchisors to itemize the initial investment cost in an easy-to-read tabular format. Watch this video to detail each expense and analyze it properly before investing in a franchise.
How Can Franchises Get Loans to Start A Franchise?
The U.S. Small Business Administration (SBA) offers a variety of options for franchisees to find financing for their franchise business. The most common route for novice franchisees to get the proper funding is a loan guaranteed by the SBA. This can be an excellent option for someone who has trouble getting financing from traditional sources.
There are various financing options available to franchisees, but there are a few main ways to get the startup cash you need to open your business.
If you’re looking for fast cash and want to get into the franchise business, you may want to consider a home equity loan. This is a great way to get the cash you need to open your own business without having to sell your home or take out a loan from the Small Business Administration.
If you have a solid personal credit history, you may want to consider a retirement rollover plan too.
If you need quick access to capital, using a line of credit may be more appropriate than a loan.
Liquid Capital Vs. Net Worth
Liquid capital is the money you have in your bank account, while net worth is the total value of your assets minus the total value of your liabilities. For example, liquid capital can be thought of as the money you have in your checking account, and net worth can be considered the value of your home.
Franchising is a great way to build your business and achieve success in the long run. There are many things to consider while buying a franchise, and I hope we’ve been able to help you with those questions; in case you need any more guidance, you can connect with us.
Frequently Asked Questions (FAQs)
Q. What is included in liquid capital?
All these are included in liquid capital: Cash or currency, bank accounts, accounts receivable, mutual funds, money market accounts, stocks, treasury bills, notes, bonds, certificates of deposit, prepaid expenses, and retirement investment accounts. You can also add some value to your liquid capital by selling non-liquid assets like cars, houses, land, etc. You can not include non-liquid assets in your liquid money until you sell them and get the amount that now is in cash or bank accounts, therefore, making it a liquid capital.
Q. I Dont have substantial Liquid Capital. Can is till Own my own franchise With No Money?
In case you have no money to start a franchise, then the best way to get some funds are:
Franchisor Financing, Bank Loans, Small Business Administration Loans, Rollovers for Business Startups: ROBS allows you to use your own retirement money, Partnerships.
Q. How much capital is required to start a fast-casual franchise?
For the fast-food franchises, start-up costs range from $10,000 to well over $1 million, along with monthly fees, which is a percentage of gross sales, typically hover around 5 per cent but can reach as high as 50 per cent, depending on the franchise.
Q. Why is liquid capital so important for Franchise owners?
Liquid capital is crucial for franchise owners as they will need to pay for various expenses such as the franchise fee, lease, construction build-out, deposits for utilities, equipment leasing down payments, and different other fees associated with bringing a to run. They also need it to keep the branch afloat for the start-up period as it could take months before you start making money via franchises. You should have enough liquid capital to support operations for a few months if you buy a franchise.
Q. How to calculate liquid capital?
Liquid capital is the assets that could be converted into cash quickly without losing any value. A liquid assets formula is used to calculate liquid capital, known as the “quick ratio” or the “acid test ratio.” It measures liquidity by concentrating on how competently a company can cover its current debts without depending on future sales or other long-term sales transactions. You can compute it by taking the cash on hand and adding accounts receivable funds and any other assets that you can convert to cash quickly. This total is then divided by current liabilities, giving you a ratio of liquid assets compared to current liabilities.
Q. Please explain to me the difference between working capital and liquid capital with some examples?
Working capital refers to the funds open to a company to sustain its day-to-day activities. A company’s working capital estimates the liquidity and overall health of the business. At the same time, liquidity is having the money to pay the company’s obligations when they are due.
For example, if your current assets are in slow-moving inventory, then it will cause your business to lack the liquidity to pay your bills on time. Another example could be if you can’t gather your accounts receivables in time to pay your employees. It’s also probable to have high liquidity but low working capital. For example, suppose you’re an online business that accepts debit card purchases. In that case, it might force your suppliers to wait for over sixty days to receive payments for supplies, resulting in high liquidity and low working capital.