How to get bank funding for franchise investment

Richard Holden, head of franchising at Lloyds TSB Commercial Banking, explains why banks are keen to hear from potential franchisees and how they can secure financial support

Many people have aspirations to set up their own business, using their extensive sector experience and thorough knowledge of both their target market and product line or service to their advantage. But often they have little experience of how a business should operate to return a profit.

Instead of letting this dampen their enthusiasm, an increasing number of people choose to invest in a franchise, rather than start their own company independently. Although financial support is required and there are still challenges associated with any new business opportunity, making the decision to partner with a successful franchise opens up avenues of support that would have otherwise been hard to reach in a competitive market.

Distinctive brand
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With over 900 franchised businesses operating throughout the UK across a range of market sectors, there are numerous opportunities to become a franchisee of an established company. Taking this route into business ownership gives you access to a core customer base that is familiar with the product you will be providing, but also to a distinctive, transferable brand that has a proven business model behind it.

It is not therefore hard to see why a successful franchise prospering through an uncertain economic climate is an attractive proposition to both potential business owners and banking providers. It offers a less risky route to opening your own business and the guidance and comprehensive operations manual provided by the franchisor offers vital insight into the systems and daily activity required to ensure the business runs successfully.

While enthusiasm and strong support are important, getting a new franchise outlet off the ground requires financial investment from the franchisee. This is often the first time they will have had to approach a bank for funding in this way and full preparation is essential.

Initially it is important to seek advice from a selection of third parties to ensure the move to invest in the franchise is feasible. Get the intended franchise agreement reviewed by a British Franchise Association affiliated lawyer, who will have industry experience and understanding. They will be able to independently check and explain any aspect of the agreement before a final decision is made.

Potential banking partners welcome an approach from someone opening a new franchise because the business comes with a tried and tested model and comprehensive support system. However, they are backing the individual franchisee and so are expecting to be approached with an in depth business plan that shows evidence of full market research and long term planning.

The business plan needs to clearly outline the objectives and overall strategy for the franchise in a punchy and efficient manor and this presents a prominent opportunity for the franchisor to step in and assist. By providing the franchisee with financial information that accurately reflects the current trading performance across its network, the franchisor enables them to shape their plan and financial projections based on a clear understanding of the direction they need to take to develop the business successfully.

Once prepared, it is recommended to run the business plan past the franchisor before approaching a bank to ensure it is realistic and achievable. All lenders will expect franchisees to have an extensive understanding of their business plan and questions and challenges on any aspect of the plan should be anticipated. Confidence and preparation is key and you should have a concise response ready for all eventualities.

Positive impression
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A few days before you meet the bank manager send them a copy of the business plan to allow them to prepare for the meeting. Presentation of the plan is also important in order to create a positive impression, as well as ensuring you demonstrate a professional demeanor throughout the meeting.

Undertaking such a significant investment requires the backing of a supportive bank that will grow with you and it is important you approach lenders that have an experienced franchise department. Lloyds TSB Commercial Banking has a proven track record of providing integrated funding to the franchise industry and we have a committed team of bank managers with extensive sector experience.

Following a successful pitch to the bank, there is a range of finance options available. We continue to approve 80 per cent of customers’ requests for loans and overdrafts and our year on year net growth in advances to small and medium sized enterprises was four per cent at the end of March 2013, which is in contrast to a net reduction in SME lending balances of four per cent across the industry as a whole.

We also utilise the government’s Funding for Lending scheme to offer discounts of one per cent to all SMEs for the life of their loans and with our Lloyds Funding for Lending offer we have committed £3.3 billion to our SME customers since its launch in September 2012.

Additional funding support available to franchisees includes the government backed Enterprise Finance Guarantee scheme, which is an option for those equipped with a strong business proposal, but lack the security the banks usually require. We were able to provide this funding to customers Katherine and Scott Morgan to enable them to purchase a Water Babies franchise in Worcestershire. Water Babies is the world’s largest baby swimming school and to meet growing demand in the area for swimming lessons the couple used a £100,000 EFG loan to open their franchise. They now teach over 200 babies and toddlers in pool locations across the region every week.

The EFG funding was also the right fit for franchisee Rachael Birchall. Following time spent caring for her grandmother, Rachael decided to move into home care service provision and after an exhaustive research process she chose the Home Instead Senior Care franchise, whose ethos on care matched her own beliefs.

We provided her with a £70,000 EFG loan to launch the franchise, which provides care for the elderly in their homes, offering services including assistance with personal care; companionship, which can involve taking clients to the park or theatre; assisting with household duties; and accompanying clients to medical appointments. Rachael opened the business in Shrewsbury and her team is now able to provide care for people across Shropshire.

Tailored packages
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Our bank managers can also offer guidance on other financing options available from our colleagues across the wider Lloyds Banking Group, which include asset based finance, leasing and debtor finance, and tailored funding packages to meet the requirements of the franchisee.

Opening a new business requires time, experience and comprehensive planning and making the decision to invest in an established franchise generates an opportunity to operate a successful business model in your sector of choice. The support from the franchisor puts you in a strong position when approaching a bank for funding, with lenders welcoming proposals from potential franchisees who have a strong business plan and desire to grow a successful business.