How to fund your new franchise business

Chris Morris, co-founder of NGI finance and NGI franchise funding, provides an extensive overview of how to approach finding the right funding for your franchise business

Starting a new business and becoming your own boss can be exciting and terrifying in equal measure. The prospect of running a business how you want to run it, working the hours you want to work and having the potential to earn an uncapped income are some of the key factors that convince entrepreneurs to take the plunge and become business owners.

Coming up with your business idea and making the decision to start is the easy part. Planning, establishing business objectives, researching financial projections and the actual start-up are what will cause the most sleepless nights. Choosing to enter the franchise market means that all these issues have already been looked at. Rather than setting up your own business from scratch or having to think up a unique business opportunity, somebody has already been through the process and established a successful franchised business which you can adapt.

Even with all the support provided to franchise owners, there are still several financial mistakes that franchisees can make which may have an adverse effect on the business. Here are 10 top tips to help you avoid some of the most common financial mistakes.

1. Plan your way to success

Neglecting to develop an accurate business plan is like not inspecting your car or planning directions when starting out on a new journey. How do you know if the car is in fit condition? Are you going to arrive safely, and most importantly, how do you get to your destination? Relating this to your business, if you don’t have a strong business plan or clear business goals, it is hard to know the steps you need to take in order to achieve success, and it can make it difficult when adapting to overcome obstacles.

In order to achieve continual business growth, you need to write a business plan, establish your marketing objectives and determine who your customer base will be. You can find business plan templates online to aid you in setting up your business structure. This will help you to achieve financial success with your business venture and ensure that you have a well-established franchise brand.

2. Understand your financial projections

To avoid making financial mistakes, create a projected profit and loss account to assess the business’ profitability, as well as a cash flow financial forecast to identify the amount of money you need in the start-up phase. It is essential to determine what your business expenses will be. Large start-up costs are incurred at the beginning of establishing your business, and your sales in the initial six months will reflect this. Establishing distinct financial projections that can be altered during your journey as a business is a critical procedure in achieving success.

3. Set realistic KPIs

KPIs (key performance indicators) allow a business to make sure they are on the right track. You need to be constantly reviewing and keeping an eye on your performance to ensure you will be a successful franchise. Comparing this against your financial projections is incredibly important, and the setting of KPIs will enable this.

4. Understand the types of finance

You cannot just jump into a car and start driving - you need to be given lessons to understand what is required and how to drive correctly and safely. The same can be said about understanding the important financial elements of a new business. You need to understand profit and loss and appreciate the purpose of your balance sheet to make sensible and informed decisions. Having the ability to spot potential problems through accounting trends allows you to act on them before they have an adverse effect on the business, so financial planning is essential.

5. Ensure you have the right amount of franchise funding

Any prospective franchisee will need a healthy bank balance. Many opt to fund the business using their own personal assets or by taking out a small franchise loan to assist with the first 6 months. The key issue here is that there is always something that has not been accounted for which can eat into the business’ cash reserves. When this happens, it is incredibly difficult to secure additional funding as lenders will be concerned about the ongoing viability of the business. Funding secured at the start-up phase is vitally important, and it is also a much easier application process. There are a range of lenders and finance companies offering expert advice on funding solutions, so think about applying for funding from the start, even if it just sits in your bank as a safety net.

6. Do you really have to know everything?

Though you may have a strong sense of business acumen and understand the day-to-day operations, that doesn’t mean you are an expert on every single aspect of your company. Financial awareness may not be your area of expertise, so surround yourself with the right business professionals. Seek help from a financial partner who can assist with your business planning and forecasting, as they can guide you on your finance options and assist with finance applications.

7. Know the difference between profit and cash

Businesses love to talk about their profit levels. Your profit is defined as the revenue that you have after all of your expenses have been covered. This is hugely important as nobody wants to run a business that does not make a profit.

However, something that is equally as important is ensuring that the business has a good cash flow. You might have a profitable business, but if you don’t have enough cash available to pay your bills and VAT returns then something is amiss.

8. Explore all your funding options

Businesses often turn to their bank when they need help with funding. For example, if you need new equipment or vehicles for the running of your business, it would be natural to approach your bank for financial resources and lending purposes. However, when you need to extend credit with your bank the options available could be limited if you have used up most of your credit with new purchases. Instead, reach out to your network and find some funding specialists who can offer professional advice. They often have far more competitive

solutions and you won’t affect the credit limit of your business by taking out business loans or personal loans.

BOXED AREA – Make sure you maintain a positive credit score for your business. Pay your bills on time, submit your accounts on time and keep all your business information up to date. A positive credit score will be a major factor when you need to apply for business funding

9. Make sure your accountant is a key partner

Accountants are invaluable provided they understand you, your business and your business model. As with any industry, there will be accountants who simply react to your needs, and there are others who will proactively work with you and anticipate your needs. The right accountant will be your sounding board, listen to your needs and then tailor their advice and support to suit you specifically. The accountancy industry is vast, so don’t just take the first recommended accountant - do your due diligence and make sure you find one with an interest in supporting you and your ongoing business journey.

10. Plan everything, even your exit strategy

It might seem strange to be talking about an end goal or exit strategy, but it is important to have a clearly defined contingency plan, just as it is important to have a strong franchise business plan. Recognizing how best to present your business in the most effective and profitable way will be a critical key feature to having an efficient operation. Ideally, preparations and plans should be initiated at least two years before the exit strategy concludes.

The franchise industry is a lucrative business to get into, and there are thousands of franchise brands to choose from so that you can find your best fit.

The author

Chris Morris is the co-founder of both NGI Finance and NGI Franchise Funding, running the day-to-day of both businesses. He previously worked for Lloyds bank for 20 years, where he ran a £200m asset finance business in the South East.