How to secure finance during a pandemic

James Thomas, commercial manager at d&t, lists the various options franchisees have to get funding in today's financial environment

For those looking to invest in a franchise or to expand a current franchised business, securing funding from a bank is a logical way to enable expansion. However, where franchises have not seen the return of footfall to pre-COVID trading levels, new investors may struggle to find funding at the moment. Banks are certainly being more cautious about lending. Some have confirmed they are not lending to start-ups at all, so as not to increase their risk portfolio in the current climate. For the most part, temporarily, these may include gyms or other franchises where groups of people come together in an indoor space or any organisation which has not been able to bounce back to normal trading levels.

Since the pandemic, banks are no longer able to provide finance on Enterprise Finance Guarantee (EFG). This is a government-backed lending scheme which is currently on hold pending review, designed to help small businesses attain start-up capital where a prospective business owner doesn’t have a property to secure against the lending.

As a result, funding options are more limited and so it’s necessary to get professional, independent advice. So, what are the options?

Usually, borrowing is available from banks to suitable candidates on a 70/30 split. This means lenders will provide 70 per cent of the investment to include the franchise purchase fee, solicitor’s costs, any assets, or equipment required, plus, working capital while the franchisee puts forward the remaining 30 per cent themselves. Just one lender is involved and it’s a simple ‘yes or no’ based on individual circumstances, the business plan and the reputation of the franchised brand.

If the cost to invest in a franchise is say £100,000, then the individual needs to come up with £30,000 themselves. To cover the shortfall, may present a challenge so what are the options?

Start-up loans offered by the government can offer £25,000 per director of a limited company. By adding a spouse or partner as a director too, it is possible to source a further £25,000 from the government. Add this lending to a bank loan to fund the full purchase price of the franchise.

Another option is asset finance. Many franchises need equipment or vehicles for example, and these can be classed separately for funding purposes. In this way, franchisees could end up with a start-up loan, some cash of their own, a percentage from the bank, plus, asset finance.

However, new franchisees must be careful to avoid incurring too much debt when starting out as this could be detrimental to long-term growth. This is called ‘too heavily gearing’.
 
At this point, I cannot emphasise enough, the importance of getting professional advice. Do your homework and talk to the experts to find out how to gain the best finance package for your circumstances but also in relation to business planning. You need to know ‘how heavily geared’ your franchise is, what your cash flow will look like, how much your marketing spend will be, where your break-even point will come and how much this will cost.

The plan needs to align with your franchisor’s forecast and these should be realistic in the current climate, not the relative economic prosperity we enjoyed pre-COVID. Remember, sales projections included in franchise marketing collateral may well relate to the pre-COVID world and so you will need to take this into consideration, as the banks certainly will.
 
In the past few months, the good news is that for the right candidates with well thought out business plans, d&t’s Franchise Funding, a fully independent funding service, connecting franchisees to much-needed finance to start or grow their business, has been able to support funding applications for around £2m of franchise investment. The industry is still moving forwards positively and franchising remains one of the most stable routes to self-employment.

The author

James Thomas, QFP is the commercial manager at d&t.