How to get funding for your franchise

Mark Scott, director of franchise development at NatWest and RBS, reveals his top tips for securing bank finance

Starting a business of any kind can be a daunting task, with securing funding a vital hurdle to tackle. You will need to work out the costs involved when drawing up a business plan and look at how much finance you will need to get started.

It is fair to say the franchise sector has performed well over the past few years - despite the recession - with a limited number of failures in the sector. So it’s good news if you’ve done your research and made your decision about selecting the right franchise carefully.

Attractive option

Franchises tend to be profitable even in economic downturns and more sustainable than an unknown start-up, making them an attractive option on both sides of the funding challenge. NatWest lends to franchisees through a UK-wide network of franchise managers who are accredited by the Chartered Bankers Institute and endorsed by the British Franchise Association.

When dealing with a potential franchisee, a franchise manager will want to know not only which franchise you want to purchase, but details about yourself, as it is the individual and not the specific franchise we assess. This is because your success will be determined by the amount of commitment and enthusiasm you are willing to invest.

The bank will lend up to 70 per cent of the total start-up costs for a franchise, although this may be nearer to 50 per cent for a less established concept.

When thinking of starting any business, it is vital to do your research. Make sure you can demonstrate its potential and how you plan to reach your goals - you must be realistic and show you are aware of the challenges facing the industry and how you will tackle them.

Be sure to fully research the franchises you are interested in. Make sure they are ethical and well run and also determine whether you can work with the franchisor and that you will enjoy the challenge, as starting a business, franchised or not, is hard work.

A good way to do this is to speak to as many franchisees in the franchise network as you can. Ask them how they found their experience of working with the franchisor and about the level of support they’ve received, particularly during the last few years when trading has been difficult. A particularly good question to ask is whether they would buy the franchise again today - they should say yes without hesitation.

Carrying out thorough research is not as easy with a new franchise, particularly if you are its first franchisee. In this case, you must satisfy yourself that the franchise has been piloted successfully and the results provided to you. The franchisor should have, or used, people with a proven track record in establishing a new franchise. The management team must also have experience in their industry.

Business plan

Be sure to set out your intentions in a well thought-through business plan. Your plan should include details about the franchise, costs, the sector it operates in, the competition - locally, regionally and nationally - your CV, your assets and liabilities and projected financial information.

Be confident of the amount of money you are likely to need to borrow and what you would use it for.

Take a close and realistic look at how much of your own finances you can invest in your business. This could be cash or you may have assets that can be converted into cash or other borrowings. You will need to calculate your net worth, which is the difference between your assets and liabilities. The resulting figure will be the maximum security you can offer for any money borrowed. Investors, particularly banks, pay a lot of attention to this figure.

Once you have worked out your financial contribution to your business, it’s time to look at finance from other sources. Always seek specialist advice and look at a range of options to see which is most suitable for you. You will also need to consider your day to day finance and running costs. You can then calculate your break-even point and see if your business is likely to make a profit or run at a loss.

As part of your business plan, you should prepare a budget that will show all of these costs against income (fees) and highlights the break-even point and potential profitability of the business at different occupancy rates. As part of your business plan, you will also need to prepare a balance sheet, profit and loss and cash flow to show how your business will perform over time.

It is difficult to tell how much money you will need, as every franchise system varies. The average is around £60,000, although if you’re purchasing a franchise where you’re providing a service and can work from home or if you have your own vehicle the cost could be lower. Franchises in the retail or food and beverage sectors generally require more capital to get started, for obvious reasons.

Ensure your request for support recognises both the challenges you face and opportunities available. Those who demonstrate a balanced and informed view of an opportunity tend to have a higher chance of obtaining support from banks because they are able to demonstrate they understand both the rewards and risks. By articulating a plan that shows how you would manage risk within a business, you are instilling confidence and creating a good impression.

Listen to the experts

Finally, always work with people with knowledge of the sector – from your advisers to expert bodies – as their experience and know-how is invaluable. They know the industry inside and out and will be able to offer you specialist insight.

Although the franchise market is not regulated, the British Franchise Association is a membership organisation whose members adhere to a code of conduct. The bfa runs regular workshops aimed at people who are thinking of becoming franchisees. There are also franchise exhibitions throughout the UK.

A few banks have specialised franchising support, of which NatWest is the longest established. We have a network of externally accredited franchise managers, who are able to guide franchisees through the process of raising bank finance.

4 STEPS TO SUCCESS

• Research which franchise is best for you and be prepared to commit time and effort to make it a success.

• Choose a bank that understands your sector. It will be easier to obtain support, as they will have a balanced, informed view of your chosen area.

• Prepare a balanced business plan that looks at the challenges as well as the opportunities. Your plan needs to be concise, but with sufficient content to allow your bank manager to understand the business.

• Invite your bank manager to your business premises. It’s amazing how this enables both parties to gain a better understanding of each other’s objectives.