How to get funding for your franchise business

Bank loans are just one option to financing your dream business. Here’s how to secure it

You’ll typically need a large amount of money to get your business off the ground. This will cover the initial franchise fee (which pays for using the brand, setting up your location, and receiving training), as well as working capital.

Some people choose to pay for this through personal savings, inheritance, or redundancy packages. However, the majority of people opt to secure funding through loans.

Banks and other lending bodies usually have dedicated franchise teams that will be able to advise you on when the apply for funding and what you need to do in order to stand the best chance of accessing funds.

Franchisors are prepared to support you with this, with some establishing bank partnerships, asset finance partnerships, in-house loans, or staggered payment plans.

50 franchise brands offering funding support in 2024

Being a franchisee has funding advantages

Lenders hate uncertainty, so they see historic financial information as the key to reducing their lending risk. Thus, applying for a loan to start a business with a franchisor that has a proven track record of success represents less of a risk than if you were to seek funds to start a business on your own.

Many franchisors have established relationships with lenders, including banks. This means, a consultant at the bank will already be familiar with the ins and outs of the franchise model and its profitability.

As a result, the bank may have a pre-approved loan arrangement to cover a certain amount of the franchise cost, for specific brands. Or the bank may be able to make a decision on your loan quicker, because of their familiarity with the brand.

Will funding still be available in the future?

The cost of living crisis may have caused economic strain, but funding is not going away in the long term.

Richard Holden, head of franchising at Lloyds Banking Group, says: “Banks are looking to assist new franchisees looking to start up a new business, though consideration must be given to the optimum time to open the business and the economic climate at that time.

“Thorough research remains essential, but the fundamental principle remains that if the franchisee has a well thought through and robust proposal and they’re investing in a strong, viable franchise brand there will be funding available at preferential terms to support their start-up plans.”

What are lending terms? And will they change?

Banks are typically willing to lend up to 50%-70% of the investment required to start a franchise. This figure usually increases for resales and existing franchisees looking to take on more locations, provided the franchisor has an established track record of success and the applicant is a good lending prospect. Will this change?

“The franchise teams of the major banks are constantly reviewing and adjusting their strategy for lending to franchisees investing in any franchise brand, whatever the economic climate,” says Richard.

Andrew Brattesani, former UK head of franchise at HSBC, said: “We’ve no intention of changing the lending criteria because the metrics are based on factors such as the franchise’s history. We have normally offered 70% funding for investments up to £30,000 and for brands with a proven track record where the investments is above that. In other cases, we will consider offering up to 50%.”

How to apply for funding

Lenders will take many factors into account when deciding whether to lend to you, but three of the main ones are:

• Your personal financial position.
• The business prospects and history of success of your chosen franchise.
• The prospects of the business sector in which the franchise operates.

Audit your financial circumstances

First look at your own financial position. Lenders will look at your creditworthiness, so check your credit history.

Carl Reader, chairman of d&t, which offers funding support, says: “Take time to appraise yourself, as well as the franchise opportunity. Are you a good bet for the lender, as well as the franchisor?”

How much money do you need?

Do you need to borrow to start the business? As well as the franchise fee and start-up costs, you need enough capital to keep paying the bills until your franchise gets into profit, which commonly takes 18 months to two years. Ask the franchisor to set out the total investment.

Work out how much you need to borrow. Avoid borrowing too little, as running out of capital is one of the major reasons businesses fail. It’s easier to borrow a bit more than you may need upfront than to borrow more once you’re running short, as banks don’t like lending to people in this position.

The all-important £25,000

You could apply for a government start up loan, which would give you a loan of up to £25,000.

If you need more than £25,000, and decide to apply for this via a bank, you’ll need to offer security. Essentially, the loan will be charged against your home, which means if you fail to make repayments your home and other personal assets will be at risk.

The amount of the loan is calculated according to the equity in your home, but instead of being based on what it would fetch on the open market, the equity is based on what you would get for it as a distress sale - usually a lot less.

Do your due diligence on your chosen franchise

Check the history of the franchise. Lenders are more likely to consider your application favourably if you want to join an established franchise with a history of success.

Many franchisors have long-term relationships with the franchise lending arms of banks and will introduce you to them.

Make a strong business plan

Lenders will demand a cast-iron business plan. Carl advises: “Ensure it takes into account the threats and opportunities that will make up the new normal on the other side of the pandemic. Lenders will be looking for sensitivity to the new situation.”

Research the future of your chosen sector even more carefully than usual. Carl says: “The sectors that are in and out of favour with lenders may well have changed.”

Get help from franchisors, banks and franchising accountants with the plan and ensure you understand it fully because lenders will ask questions about it.

It’s also really important that you seek independent legal and financial advice.

Work out all the options

Shop around for franchise funding as bank loans aren’t the only option. You might be able to get an in-house loan from your chosen franchise brand; there are also asset finance lenders, as well as local business grants.

Also consider resale franchises as a history of growth and profits will attract lenders, but remember the investment will be far higher than for a greenfield site.

Resale franchises come up for sale for numerous reasons, so find out the real reason before investing in one.

Be aware of the latest figures

Being aware of the financial statistics relating to franchising is the best way to navigate funding in a difficult UK economy, especially if you’re concerned about the impact of the cost of living crisis.

A majority (85%) of franchise units are profitable in the UK (a slight drop from previous years) according to the 2024 National Franchise Survey by the British Franchise Association and NIC Services Group.

However, the number of franchise systems and franchise units has grown this year in the UK. There are now 1,009 systems (an 8% increase since 2018) supporting 50,421 franchise units (a 4% increase since 2018).

Franchisors are optimistic about the outlook of the industry, with 87% expecting improvement in their company’s condition and 53% expecting better general economic conditions.

Similar resilience was seen in the financial crisis of 2008. Franchise revenues experienced 20% growth, while the overall UK economy contracted 2.5%, according to the British Franchise Association.

Funding in action: Ash Mustafa, Driver Hire franchisee

Ash Mustafa waited three years for the Southampton office of logistics recruitment franchise Driver Hire to come up for sale before buying it in March 2019.

“I knew about the Driver Hire franchise and that my local Southampton office was a good performer, so I waited and spent the years researching it,” says the former manager.

“Immediately I heard it was available as a resale I wanted it, but I couldn’t afford it without borrowing.”

A house sale helped raise funds and Driver Hire head office put him in touch with bank franchise specialists.

“I created a business plan with help from head office and two lenders offered loans immediately, doubtless partly because the Southampton franchise had a 27-year history and was profitable,” Ash says. He also checked the accounts with the help of two accountants.

“After 13 months, I’m now halfway through repaying my bank loan and my family are living as well as we did before my wife Charlene and I started the business.”

Funding in action: Sejal Sira, TaxAssist Accountants franchisee

Sejal Sira launched a TaxAssist Accountants franchise in Watford with her husband Kan in 2009.

Former lawyer Sejal says: “It was the height of the last recession, but we knew accountancy services are all but recession-proof. So when Kan was made redundant, we took the chance to start our own business.”

The couple raised the necessary funding using Kan’s redundancy payment and a loan from NatWest, arranged with its franchise lending team.

“We had to draw up a business plan - not a huge problem, given our skills - but TaxAssist head office also helped with it,” Sejal says.

And it helped that they were starting a franchise business.

“We had a strong growth mindset and lots of guidance from head office about marketing, social media and networking,”

Sejal says. “Business leads started coming in immediately.”

The couple now have two more offices, in Barnet and Borehamwood. “During the lockdown, we contacted clients offering our expertise and we’re helping many of them access government support schemes,” Sejal says. “We are busier than ever and this kind of goodwill gesture means we’re more likely to keep them.”

“Recession can bring opportunities,” Sejal adds. “Redundancies mean people start new businesses and big companies swap their accountants to smaller ones to cut costs.

“Companies leave the market and businesses looking for efficiencies change suppliers. We are signing up two or three new clients a week, even under lockdown. A recession can be a good time to start a business.”