Written by Andrew Cutler, franchise director of Card Connection
There has been much publicity about banks being reluctant to supply loans to businesses in the current economic climate.
When it comes to funding a new business the common perception is that the situation will be a similar one. However, securing funding to purchase a franchise is a little different and usually tends to be a much more positive experience.
In actual fact, banks tend to be far more willing to lend money to fund a franchise than for the purchase of an ordinary business venture because franchises are based upon an established, successful and replicatable business model.
Major banks including HSBC and Lloyds TSB have dedicated 'franchise'departments created especially for the franchise sector. These departments have franchise knowledge and are used to working with prospective franchisees.
Franchises have a much lower failure rate than new business ventures and so the proven franchising format is seen as a relatively low risk by these financial institutions. In addition, the banks know franchisors also provide the necessary support in terms of training, marketing, buying power and even research and development, meaning the risk of business failure is further minimised.
Before approaching a bank you need to check how much funding is required. The start-up costs for a franchise will vary but usually include the initial franchise fee.
However, it is essential to check what other fees will be needed to get the business up and running. Some franchisors charge extra for training and promotional costs for example. You will also need to think about initial outlay for stock, premises, vehicles and any equipment required.
The amount that banks are willing to lend can vary up to 70% of the purchase price of the business.
However, it is important to think carefully about borrowing substantial sums as you will also need to consider other start up costs and working capital. It is not advisable to over stretch yourself in the early stages of running a franchise as the learning curve will be steep and there needs to be room for contingency.
Card Connection’s franchisees start earning from day one, but this is not the case with all franchises. With any business you will need working capital while the business gets up and running so consider the amount required carefully, as some business models will require more than others.
Once these costs are established, there are various ways to finance your franchise and discussions with a bank will allow you to see which is the most suitable option: A business overdraft will allow flexible borrowing but may not provide enough capital to purchase a franchise.
With any business you will need working capital while the business gets up and running so consider the amount required carefully, as some business models will require more than others
A business loan however, allows banks to lend limited amounts of funds with agreed repayment terms over the lifetime of the loan. These can vary from large or small loans, some are short term loans and others can be repaid over many years.
Sometimes initial repayments can be deferred to assist with initial cash flow requirements. Some banks offer payment ‘holidays’ which can help with expansion costs in the future.
A commercial mortgage may be necessary if you need to buy property for your franchise. This works rather like a domestic mortgage with certain business specific conditions attached.
Once you are up and running, invoice finance can free up cash from invoices to help with cash flow. Qualifying loans can be backed by a government guarantee for up to 75% of the loan.
It is worth discussing these options in detail with your bank. Discussing finance with your franchisor may also prove beneficial.
For suitable franchisees, your franchisor may be able to offer assistance to amortise (spread out) the cost of the purchase of a business over time, as an incentive. These deals are rarely advertised so it is always worth asking how a franchisor might be able to help.
If the franchisor is confident the business is sound and satisfied that you are a good potential franchisee, they will be happy to work with you to find an innovative way to solve the financing issue.
However you choose to finance your franchise business, help and advice is on hand from banks and your franchisor. You will need to come up with a proportion of the funds yourself but don’t forget this is a relatively risk-free investment into your future.
If you don’t know how much cash you are likely to need, have an open discussion with your potential franchisor and an independent accountant. They will be able to work with you to answer this question and are there to help.