Fast track your franchise funding with these top tips

Making sure fledgling franchise businesses have access to the finance they need to support growth is vital

Franchising is one of the fastest-growing areas of the economy and is attracting thousands of new entrants. Making sure fledgling franchise businesses have access to the finance they need to support growth is vital.

Research from the British Franchise Association shows there are now nearly 50,000 franchise businesses collectively contributing over £17 billion to the UK economy, up 14 per cent over the past three years. In the last two years, more than one quarter of franchisees were aged 30 or under.

Many of these may not have approached a bank for finance before and may not know where to start. At HSBC UK, we have had a specialist franchise team for over 30 years, working with small, one-person companies up to franchise businesses employing over 8,000 people.

Path to success

In broad terms, franchising is statistically proven to be a more successful option than going into business on your own. Around 90 per cent of franchisees have reported profitability annually for over 20 years running and many hit profitability within two years of opening. A franchisee should have a tried and tested format to follow, training and support from their franchisor and a network of fellow franchisees to speak to.

So although franchisees own and operate their own businesses, they are not doing it alone and are typically buying into an established brand with a defined market. A good franchisor will encourage and help their franchisees with business planning, both at the outset and on an ongoing basis, helping the business to get off to a flying start and continue to develop.

Many small business owners are too busy to look at what is happening in the marketplace, what competitors are up to and how customer needs might be changing. A good franchisor will be looking at research and development, helping their network of franchisees to keep ahead of the game. All this support means that banks are going to be typically supportive to lend to a start-up franchisee.

How much funding will you need?

But before you’re ready to talk to a bank about borrowing money to start your franchise, you need to establish how much funding you will need.

There are a number of costs that need to be taken into account, depending on the type of franchise, as the initial franchise fee is really only part of the picture.

For instance, an owner/operator franchise may need to purchase or lease a liveried van and they will need to fund opening stock, while a retail franchise will incur the cost of leasing premises and any refurbishment requirements, as well as shopfront, branding, fixtures and fittings.

Franchisees will also need to think about professional charges related to the property transaction, such as lawyer, architects and surveyor’s fees, as well as insurance. If employing staff, there may be recruitment costs and the franchisee may also need to provide uniforms. In addition, there will be marketing costs involved in the official launch of the business.

Working capital will also be required - what you need to live on prior to the business generating cash flow and profits. Find out whether training costs are included in the initial franchise fee. If not, these will have to be factored in.

Once up and running, you will pay the franchisor ongoing management services fees, which may be a percentage of your turnover, a mark up on products provided or a fixed monthly or weekly fee. Fully research what you will be getting for your money, both at the outset and once your business is established.

What can you afford to invest?

For an established franchise, most of the major banks will lend up to 70 per cent of the start-up costs. For new franchises, the figure will probably be 50 per cent. Banks will often reach an agreement with franchisors to provide finance for their franchisee network, with the franchisor providing funding guidance.

One of the first steps is to establish how much money you can invest in the business. What can you afford to invest in? Have you got savings? Can your family help?

Prepare a full list of your personal expenditure, including 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.

Own your business plan

Start preparing your business plan, which is a vital document to obtain finance from a bank. Your chosen franchisor will often help you with this.

As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure you understand the figures, what they are based on and how much you will need to turn over in order to break even.

If you don’t understand the figures, or have no answer for possible questions that could arise, the bank won’t be as confident in lending to you. Think about the possible questions, learn the key metrics of your business and come up with some contingency plans so you can be prepared if you are asked difficult questions about how your business will operate.

It’s important to consider the financial implications carefully before buying a franchise. You are entering into a long term commitment and need to get the finance right at the outset.

The author

Andrew Brattesani is head of franchise at HSBC UK.