Financing your new franchise

Getting set up in business doesn’t have to weigh heavily on your personal finances, as banks make it straight forward for franchisees to borrow

Did you know there’s a range of funding available for your franchise, ranging from secured fixed rate and variable rate start-up loans to short-term assets finance and leasing? It pays to shop around for the best loan and interest rate to suit your personal and business situation.

Look for a lender that has experience in dealing with the franchise market. Most high street banks have specialist franchise teams or departments - and as they already lend to other franchises, they can often provide valuable insight into your financial projections.

The good news is that right now lenders are keen to lend to franchise businesses because the models are generally tried, tested and successful. If your application stacks up and if it’s presented correctly, the money is often there for you to achieve your business ambitions. Lending is all about measuring risk, and rightly or wrongly franchises are seen as less risky than other types of business.

Banks have learned that it’s often safer to lend to franchisees of well-structured, ethical franchise systems. The track record of the franchisor is therefore hugely important to a bank when assessing whether to lend finance. Franchise opportunities with a good reputation and track record will be ranked more favourably.

It’s worth noting that while potential franchisees often want to stay with their personal bankers when looking for finance to purchase a franchise it can often be better to speak to banks with specialist franchise units. Of the high street banks, HSBC, Lloyds Bank, RBS and NatWest are all franchise finance lenders.

The main benefit of approaching these lenders is that they understand franchising and the benefits of this business model, compared to a conventional startup. This, combined with the lower risk of franchising, means that funding is often more likely to be available and forthcoming.

How to get finance

The first step is to understand the total franchise investment that you require. Many quote only the franchise fee when considering start-up costs, but potential franchisees must also factor in working capital, VAT and professional fees.

It’s also important to think about your maximum personal commitment, as banks will usually only lend between 50-70 per cent of the total start-up costs. Identify the total amount you need to successfully start your franchise business before seeking borrowed capital.

To be successful in a finance application, the business plan needs to include all the information required by a lender. It should start with an executive summary, which gives a concise overview of the business opportunity and its funding requirement. It needs to identify the owners of the business and provide their personal information, such as name, address, dates of birth and copies of their resumes.

Any lender will perform a credit search on the business owners and will need all this information to be able to do this. You will also need to set out your personal assets (e.g. your house, investments, savings) and liabilities (mortgages, loans, credit cards).

The lender will want to see your household expenditure and what income you need to cover this, ensuring that you can afford to pay your bills while you’re growing your new franchise business. If your income will be coming from the new business, make sure that you include it within the financial projections.

You will need to show the total investment required for the franchise, detailing how much of the investment is coming from you, and how much finance you’re asking for from the lender. You will also need to provide detailed financial forecasts. You should include monthly profit and loss projections, a cash flow forecast, and a forecast balance sheet. The profit and loss projections will show the trading activity for the business - the sales, costs, and profit you expect to make. The cash flow forecast will set out the incoming investment from you and any borrowed finance; the set-up costs going out; the money coming in and out through the trading activity, and VAT.

Range of borrowing options

Many banks offer flexible borrowing to suit your circumstances and you can also look for finance from other sources. These include business overdrafts, which are often easy to arrange, where you pay interest only on what you use and which is calculated on a daily basis.

You could also look into a small business loan, which will allow you to borrow between £1,000 and £25,000. Repayments and interest rates are fixed for the life of the loan, with terms ranging between 12 months and 10 years.

You could also consider applying for a flexible business loan. This is suitable for limited companies borrowing over £10,000, or sole trader and partnership businesses borrowing over £25,001. You can also repay this over a period of 12 months to 15 years (10 years for fixed rates). Look into an enterprise finance guarantee, a source of borrowing to help you expand or diversify your business, or increase your working capital. Many come with a government guarantee, which secures loans, covering 75 per cent of each qualifying loan.

Another option is to take out a commercial mortgage. You may be able to buy, extend or develop business premises, and you can tailor your commercial mortgage to your needs. Many can be designed specifically for commercial owner-occupation.

You might want to think about utilising a business credit card. You can save time and money by separating personal and business spending and improve cash flow with up to 56 days of interest-free credit. Many now have special offers and discounts from leading retailers. You can easily view your card transactions online using business internet banking, and also buy your goods and services securely online.

Finally, look at the government-backed Start-Up Loans Company, which offers unsecured personal loans up to £25,000 to small franchise businesses that have viable business plans.

The most important piece of advice, however, is to look well into the future when going through this process. The franchise may work well as a business currently, but you also need to think about long-term challenges. What threats are there from competitors, potential new regulations, or rising costs, such as fuel prices, that might erode your profit margins? Will you be able to sustain your net income figure in years to come?

In fact, for any business to ‘stand still’ financially, it always needs to be growing and taking on new customers in order to make up for changes in the market. For example, old reliable customers may go elsewhere, or change their business model so they no longer require your services. For this reason, it’s essential to consider the degree of untapped potential in any franchise.

The author

Colum Smith is head of vision at Taylor Rose MW.