Once you’ve chosen a business from among the franchise opportunities available and the franchisor has accepted your candidature, you should start investigating how to generate the funds to pay the franchise fee and provide enough working capital.
Most banks and lending institutions expect you to have a reasonable credit rating and to provide a portion of the cash out of your own pocket.
However, if you have some sort of security – for example property or shares – then they may be willing to furnish you with 100% of the purchase price.
Another advantage of using your property as security is that the bank will be willing to grant you much longer repayment terms, thus reducing your monthly repayments. The drawback is obvious of course – your property is at risk, which makes it all the more important to pick your franchise brand with the utmost care.
What if you have a poor credit rating or are unable to commit security to the deal? One solution is to persuade a wealthy individual to be your guarantor, who will make up any shortfall should you prove unable to meet your repayment obligations.
Most major high street banks have specialist franchising departments so will be well versed and able to help you through the process.
There’s more to your application than your financial means and credit record. The bank will want to gauge your CV, your attitude, and indeed the credibility of the franchise opportunity in question.
To prove you’re committed, prudent and entrepreneurial you need a business plan. Your franchisor can help you formulate a business plan, which should include financial projections for your first 3-5 years with best-case and worst-case scenarios showing you’ll be able to repay the loan under a full range of circumstances.
You are well advised to take out insurance to ensure you can meet loan repayments if you fall ill or have an accident. You can include insurance as part of your loan terms with your lender, although it might be cheaper to obtain separate insurance.
Whether it’s for a franchise or starting a business from scratch, the principles that apply In persuading banks to lend you money are broadly the same: prepare a business plan with realistic financial projections, substantiate how you can contribute financially to the deal, and approach any interview with a bank manager with the same preparedness you’d bring to a job interview.
However, it’s arguably easier to make your case and obtain the loan if you’re buying a franchise. Statistically more likely to succeed than a start-up, a franchise is seen as a proven model by banks, who are therefore easier to win over.
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