8 ways to foolproof your franchise financing

Whether savings, a redundancy payment or a bank loan, how are you going to finance it?

So, you’ve chosen your ideal franchise, but how are you going to finance it? If you have savings or a redundancy payment to cover the start-up costs, you’re in a very fortunate position. If not, you’ll have to seek some source of external finance.

You may assume it will be difficult to get a bank loan in the current Brexit influenced economic climate. However, the banking sector is still very much in favour of franchise businesses, as they are statistically proven to have a greater chance of success and are therefore seen by the banks as less risky.

This doesn’t mean you can take it for granted that your application will be approved - many potential franchisees have failed to secure funds because their approach was ill prepared.

1. Speak to the right department

It’s essential you speak to the right department in a bank. Most of the high street banks have specialist teams with an in-depth knowledge of the franchise sector and it’s this department you need to put your proposal to.

2. Decide how much you want to borrow

Before even approaching a bank, you’ll need to decide how much you need to borrow. Banks will generally lend around 50 per cent - occasionally up to 70 per cent - of the start-up costs, which includes the franchise fee and working capital. So say the total set-up cost is £30,000, a bank might fund £21,000, leaving you with £9,000 to fund yourself. Depending on your creditworthiness, you may have to provide additional security to the bank.

3. Don’t underestimate how much you will need

Be realistic about how much you will need. Very few franchises will produce revenues from day one, so you need to think about your domestic and business outgoings in the first few months and how they will be covered.

4. Have a back-up plan

It’s also wise to have a contingency fund put aside to cover any unexpected events - a customer may not pay you or you may have to take time out of the business to deal with a domestic matter. Many franchisees have found themselves running out of cash because they have been overoptimistic about future earnings and not been realistic about what could go wrong in future.

5. Prepare a detailed business plan

A bank will want to see a business plan and proof you have done your homework. The plan should contain information about the franchise and the market opportunity, background details about yourself and anyone else involved in the business, plus basic financials such as sales and cash flow forecasts.

6. Do your homework

Banks will want proof you have done your due diligence, so make sure you have looked at the markets, trends and competitors, and that you have checked out the franchisor’s background and spoken to existing franchisees.

7. Be realistic with your numbers

You need to know your numbers inside out, so test your projections. Are they too conservative or overambitious? Banks see hundreds of business plans each month and instinctively know what are and are not realistic numbers, so try to give a genuine forecast without sounding too pessimistic.

8. Funding, funding, funding

Lastly - and I cannot emphasise this enough - don’t start up underfunded. Make sure you have borrowed sufficient working capital in addition to the fixed upfront investment. Business is hard enough, so don’t fail simply because you ran out of cash just as your business was starting to succeed.

The author

Suzie McCafferty is CEO of franchise consultancy Platinum Wave.