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The Franchise Forum

Expert financial advice, content, and strategies for your franchise business

Glossary

amortization

Debt payoff schedule which determines the fixed rate in regular installments (monthly).

area developer

An individual or group who pays an upfront development fee to the franchisor to open a certain number of locations by a specific date, regardless of territory. Generally, there is also a franchise fee for each unit opened.

asset coverage ratio

Refers to the ratio of debt obligations to assets after all liabilities have been satisfied. We generally look for a minimum of an asset coverage ratio of 1.5x the loan payments.

balloon payment

Repayment of the outstanding principal sum made at the end of the loan term if the amortization differs from the term duration.

capital gain

A profit from the sale of property or of an investment

credit report

A detailed report of an individual's credit history. Credit bureaus collect information and create reports, which lenders use to determine credit worthiness.

debt service coverage ratio

Ratio of cash available for debt servicing to interest, principal and lease payments

down payment

A cash injection made by the borrower, which is a percentage of total project cost (typically 20-30%)

EBITDA

Earnings before interest, tax, depreciation and amortization - a measurement of business performance without factoring accounting decisions or tax environments.

equity

Money value of a property or of an in a property in excess of claims or liens against it

financial liabilities

Contractual obligations to deliver cash or similar to another entity or a potentially unfavorable exchange of financial assets such as accounts payable, salaries, and income tax

Franchise disclosure document

A legal document containing information essential to potential franchisees which is presented to prospective buyers of franchises in the pre-sale disclosure process

guarantor

An individual or entity which co-signs the credit agreement to provide additional assets to guarantee a loan.

Liquidity

Liquidity includes personal cash, cash in a business bank account that is owned 100% by guarantors, marketable securities not in retirement accounts, retirement funds (if reached retirement age), or home equity lines of credit.

maturity date

Refers to the final payment date of a loan

prepayment

Settlement or payoff of a loan before it reaches maturity

prime

the prime rate is the interest rate that commercial banks charge their most credit-worthy customers.

SBA loans

Government backed program for start-up and existing small businesses. SBA does not make loans itself, but rather guarantees loans made by participating lending institutions.

UCC Filing

(Uniform Commercial Code) is a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor

underwriting

Process that a lender uses to assess the creditworthiness or risk of a potential borrower

working capital

Refers to any day-to-day business costs outside of fixed costs (rent, utilities, etc) that may be required to reach profitability