FranFinders – What is Liquid Capital for a Franchise?
If you have been searching for a franchise to buy, you have undoubtedly come across each company’s investment requirements. There are a myriad of terms used, and it can be confusing. A commonly confusing term is “Liquid Capital.” In nearly all cases, franchisors define liquid capital as the cash you need, on-hand, to be able to enter into their agreement. Each franchisor has their own liquid capital requirement level.
“On-hand” means non-borrowed, in-the-bank and ready to invest. Loans, non-cash assets (like property or houses) do not apply. The liquid capital is used to pay 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 business started. Once the business has started, there are ongoing expenses which can include; rent, wages, advertising, royalties and cost of sales. Until your new business starts to flow enough cash to cover these costs, you will need to have capital on hand to cover.
Another, fundamental, definition we use for liquid capital is: “the money you have in your bank or under your bed that if you were to invest in a business, you still could buy food for your family.” This practical definition sums up two thoughts. One, we do not recommend someone borrowing funds to cover the liquid capital requirements. The extra load of debt puts a burden both on the income statement and the mind. One word summary, “stress.” Secondly, you must be able to afford to live if in the case you were to completely lose the investment. We encourage people to make sure their personal finances are in order before investing in a business.
If you have high credit card balances, an unreasonable debt to income ratio or monthly obligations that are currently causing a strain on your finances. Starting a business should be secondary after you straighten out your personal finances. Use our definition of liquid capital to help you decide on whether a particular franchise is right for you. You can also contact us, as franchise consultants, we partner with people to help them find the right franchise.