How to.... Finance your franchise
You've found your franchise, but now you need to know how to finance your franchise. Most major banks and franchise funding associations have specialist franchise teams within their setups, that will help guide you (a prospective franchisee) through the process of acquiring your dream franchise.
A good franchisor will be looking at research and development, helping its network of franchisees to keep ahead of the game. All this franchise support means that banks are going to be much happier to lend to a start-up franchisee in comparison to a standalone start up. With banks, it’s all about analysing the risk factor.
For banks and lending providers, the franchising concept is seen as a more secure option of lending than compared to that of an individual going into business on their own. The reason behind this is the fact that a franchisee will inevitably have a tried and tested format that they can follow as franchising will demonstrate a track record of success – a proven model to replicate. Franchising is a concept that is with you from the start, you don’t just part with the cash in exchange for the keys of your new business, oh no! Training and continual support will be provided by the franchisor to ensure you’re following the proven model. You will also have your fellow franchisees from within the franchise network to communicate and feed off with. You’re ultimately in business for yourself, but not by yourself and this is why major high street banks find lending to franchising so attractive. The risk factor is ultimately reduced.
All of the above support and continual development of the franchise model (securing national contracts for the franchise network) from the franchisor only aid and enhance your chances of securing funding for the franchise. This is all great news, but you need to understand how much money is actually required to set up your franchise. There’s more involved than just the initial investment fee…
Other costs that may need to be considered –
- Lease option on a van/car
- Fund opening stock
- Leasing premises
- Refurbishment requirements
- Shop front/fit
- Working Capital
- Launch of the franchise
- Ongoing advertisement
- Management Service Fee
Professional Fees that must be considered –
- Franchise Lawyers’ fees
- Surveyors fees
- Insurance fees
- Franchise Consultant/Advisor fee
- Employing staff – (recruitment fee)
Once your franchise is up and running, you will pay the franchisor an ongoing management services fee (MSF) - these may be a percentage of your turnover, a mark-up on products provided or a fixed monthly or weekly fee. This will be outlined in your Franchise Information Memorandum when initially looking at the franchise opportunity. It’s important that you conduct full due diligence to really understand the potential performance and what you will receive back.
For an established franchise, most of the major banks within the UK will be prepared to lend up to 70 per cent of the start-up costs, for new franchises the figure will probably be around 50 per cent to 60 per cent. There are other funding bodies like Transmit that offer an unsecured loan of up to £25,000, with just a 6% interest.
You as the franchisee will pay the funds you’ve borrowed to purchase the franchise back over an agreed period, maybe three or five years, depending on circumstances.
The first stage for a prospective franchisee is to assess how much money you can invest in the franchise business. What can you afford? Have you got savings and can your family help? Then prepare a full list of your personal expenditure: mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business in order to live. If you need assistance, your accountant should be able to help you draw up a detailed franchise business plan. Along with your Accountant, the franchisor should help with the preparation of your business plan, this document is a key factor to securing the desired finance from the bank to purchase your desired franchise opportunity. A basic business plan will include elements such as a cash flow forecasts and projections for the first 2 – 5 years of operation. This will clearly show what turnover figure is required to achieve the magic breakeven point.
This needs to be conducted with great care and you need to ensure that you provided honest and accurate data. Franchising is a short term affiliation, the average agreement will tie you down for a 5 year term, so you want to ensure you actually have enough and not to obtain (borrow) more funds that you can afford to repay.
How the High Street bank makes a decision:
The following outlines a bank's basic approach to assessing a request for finance and should provide a useful insight into the information we would need before agreeing to lend.
They will look at your individual background and reliability to establish your track record, financial resources and suitability to run a business.
How much you'd like to borrow, how is it going to be used and how it will benefit the business. How much you are prepared to invest in the franchise business?
It is not in our interest - or yours - to lend money unless we think that you will repay it. Therefore, we will need to understand from the cash flow forecast how you can afford to repay the loan. What assumptions have been made? What level of sales are needed to break-even and is it achievable? Is there a contingency plan for any setbacks?
The banks and lending providers must assess the risk and decide whether security is required for you to pass the lending stage. This will depend on our evaluation of your business as a whole - the prime source of repayment will be cash generated by your franchise business and no amount of security will ever be acceptable if we feel that your franchise business is not a viable option.