Raising finance to buy a franchise

Understanding the costs is the first step to finding finance.

Buying a franchise can let you start a business with proven potential for success, but it can also mean substantial costs .

Understanding exactly what those costs are is the first step to finding finance..

The costs of taking on a franchise

The costs will vary from one franchise to another, but they will usually include:

The initial franchising fee. This can range from £10,000 - £20,000, although it may be possible to defer a proportion of this until you have begun operating.

Premises. Unless you already have suitable premises, leasing or buying could be the largest expense of all. Your franchisor will want to approve your choice of premises.

Fit out. The franchisor may be able to offer help with the fixtures and fittings and provide a team to do the work, but the costs will still be yours.

Stock and operating costs. You may be able to welcome customers in from the day you open your doors, but you may not show a profit for weeks or months. These costs will depend on the type of business you are franchising.

There may be a monthly fee and additional expenses to consider once you are up and running, especially in the crucial first few months of operation.

The actual costs will depend on your type of business, the size of your operation the sector you work in and the region where you are setting up. Your franchisor will work with you to provide details of the costs you will need to find.

Once you have a clear idea of the costs and have a reasonable amount set aside for unexpected extras/living expenses until the business turns a profit – you will be ready to look at how to raise the cash.

This will almost certainly mean a loan, which will provide the cash you need to set up your business and let you repay once the business itself is generating the necessary funds.

Answering your funding needs

You’ll need answers to the following questions:

Do you have what it takes?

Lenders will run a background check on you, covering your employment history, qualifications, previous business experience and any other aspects that are relevant to your suitability to running a business in your chosen industry.

So, can you really demonstrate the necessary skills? You must be realistic about your own abilities, knowledge of the sector and willingness to put in the kind of effort required.

How much can you afford to invest in the business?

If you have sufficient funds to invest in setting up your franchise. If you have money from the sale of a previous business or a property then you may not need to borrow. However, most people are unlikely to be able to afford the whole sum required.

Lenders will want to see some contribution from you to ensure that you are really committed to the business. This may need to be as much as 30%.

What security can you offer?

The sum required means that you need a secured loan. You may need to put up personal or business assets as security that the lender can take if you are unable to keep up the repayments. Your business premises or your home may provide suitable security.

Putting these assets at risk may cause you anxiety, but if your franchising plans are sound, the risk may be small, and you should be able to get the funds you need at a rate tailored to your business projections.

What are the costs of borrowing?

The size and term of the loan are will help determine the interest rates. Lenders will also decide the interest rate according to perceived risk (how likely they are to get their money back).

The greater the value of the security on your loan is, the lower the risk, and therefore the lower the interest rates will be.

You need to tailor your loan and your repayment commitments to the level of revenue your new business will generate.  Decide what sales revenue you need to make each month to break-even, and assess whether your projections are realistic

Some of the larger, more established franchises have special finance schemes. A fee may be levied with such a scheme; however, you may be able to find a more cost-effective solution elsewhere

Do you have a sound business plan?

A professional business plan is essential. It will demonstrate to the lender that your approach is business-like, that you are a good risk and that your business has excellent prospects for success.  

It will also show that you have a sound grasp of the financial facts and figures and that the lender has a good chance of getting their full repayments.

You will need projected cash flow forecasts - these are predictions for at least the first two years. They will want to know exactly how you arrived at these projections, what they are based on and what turnover is needed. Your franchisor should help you prepare cash flow forecasts.

If you are buying an existing franchise business then the lender will want to know about its financial performance. You should provide details of its accounts for the past three years.

Help with your business plan

Your franchisor might be able to help with the details of your business plan and may have standard charts and figures to contribute.

Before you present your business plan, you should seek advice from an accountant to ensure that it makes sense from a financial perspective. You should also get your solicitor to look over the document to ensure there are no legal issues.

Topics to cover in your plan include:

How established, how reliable, and how reputable your brand is.

The market conditions – your competitors and your customers

The demand for your product or service

Cashflow projections. Establish what assumptions are built into your forecasts

How you will provide a contingency plan it things go wrong

Your future plans for growth

The total you need to borrow to take on the franchise

How much can you contribute yourself?

What security can you provide to back up your borrowing

How long you need to repay the loan

The potential profits - how the level of investment you need is justified

Viability: Can you recover the money you have put into the business, repay a loan and still see a profit?

About you – demonstrating that your experience is adequate to run the business.

Get expert help finding the funding you need

Conventional business lenders, such as banks, may be reluctant to help, as your business is technically a start-up, lacking a comprehensive business history.

Fortunately, there are banks who may be able to help as well as a number of other lenders some of which will specialise in providing finance for franchises

Getting expert help with finding the most receptive lenders, and with approaching them in the most appropriate way may be essential.

One way to get this kind of help is to call to our business funding finder partner, Rangewell. The Rangewell team is made up of experts in all areas of business lending. They can work with you to look at your business plan and find the business funding solutions you need, providing a bespoke funding plan for your particular needs.

Rangewell, know the specialist lenders who can help with purpose-built franchise loans. They will look at your experience, your business proposal and the potential of the franchise you have chosen - giving you the chance to benefit from their expertise, as well as the finance you need.

Richard Mitchell

About the author

Richard is one of the members of the Rangewell content team. Richard has worked with international banks as well as fintech business, and now researches and writes all types of content for financial and business readers