HOW TO FINANCE YOUR FRANCHISE

Cathryn Hayes, HSBC’s head of franchising, provides some expert advice on finding bank funding

At HSBC we’ve had a specialist franchise team for over 25 years, and most of the major banks also have franchise units. So what makes the banks interested in franchising?

In broad terms, franchising is a safer option than going into business on your own. 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 business, they are not doing it alone.

A good franchisor will encourage and help franchisees with business planning at the outset and on an ongoing basis - helping the business 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 customers’ needs might be changing, but a good franchisor will be looking at research and development to help its network of franchisees keep ahead of the game. All this support means that banks are going to be much happier to lend to a start-up franchisee. 

BEFORE APPROACHING YOUR BANK
But before you talk to the 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 - the initial franchise fee is only part of the picture. For instance, an owner/operator franchise may need to purchase or lease a liveried van and will need to fund opening stock. A retail franchise will incur the cost of leasing premises and any refurbishment requirements, as well as shop front, branding, fixtures and fittings. 

Franchisees also need to think about professional charges related to the property transaction, such as lawyer, architect and surveyor’s fees, as well as insurance. If employing staff, there may be recruitment and uniform costs. In addition, there will be marketing costs involved with an 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 pay the franchisor ongoing management service fees. This may be a percentage of turnover, a mark-up on products provided or a fixed monthly/weekly fee.

The next step is to establish how much money you can invest in the business.
Prepare a full list of your personal income and expenditure - mortgage, household bills, partner’s earnings, etc. This will show how much money you need to take out of the business to live. Consider what security you can give to back up your loan, eg equity in your home.

Start preparing your business plan, a vital document to obtain finance from the bank. 
A good business plan is a route map to future success, as well as helping to secure finance and support. Cash flow forecasts for the first couple of years of the business will also be required. Your franchisor will help with this, but you need to be sure that you understand the figures, what they are based on and how much you will have to turn over in order to break even.

It is 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. Don’t do it on a shoestring, but don’t borrow more than you can afford to repay.  

ASSESSING FINANCE REQUESTS
The following outlines a bank’s basic approach to assessing a request for finance and should provide a useful insight into the information you need to supply: 

• Person. Who are we lending the money to?
We will carry out a full review of your background and reliability, training, qualifications, track record, financial resources and suitability to run the business. 

• Amount and purpose.
Apart from the actual amount, we will also look at the purpose for which the money is going to be used. We will evaluate the business, the type of finance requested (overdraft, loan or a package of financial services) and how much you are prepared to invest in the business. For an established franchise, most banks will lend up to 70 per cent of the start-up costs; for new franchises, the figure will be around 50-60 per cent.  

• Repayment.
It is not in our interests - or yours - to lend you money unless we think you can repay it. A lot will depend on business performance and, as always, a well thought out and structured business plan and cash flow forecast will demonstrate that your business can afford to repay any lending.

With interest rates at their lowest level since records began, finance is more affordable, having a positive impact on those looking for it. However, individuals still need to ensure they protect themselves against rate increases. There are a number of methods available, and your bank can develop a suitable package.

• Security.
We also assess the risk of lending to you and decide whether security is required. This will depend on our evaluation of your business as a whole - the prime source of repayment will be cash generated by your business and no amount of security will ever be acceptable if we feel that your business is not viable.

If no security is available, we may consider finance under the government’s Enterprise Finance Guarantee, if the business is eligible. This is a government backed scheme to guarantee 75 per cent of borrowing where security is not available and where lack of security is the only bar to the bank lending money.

• Interest and fees.
When we set an interest rate we take into account a number of factors, including your stake in the business, security deposited and our evaluation of the risk involved. 
We may also charge a fee to cover the costs of setting up new borrowing and completing the security arrangements.

TYPES OF FINANCE
The provision of finance can be in several different forms. Loan accounts are most often used for the purchase of assets such as property, where the loan will run for a longer period, or a vehicle purchase, where the term of the loan will be shorter to reflect the rapid depreciation of the asset. Fixed interest rates are often available.

An alternative method of funding working capital is invoice finance, which involves raising finance using your debtor book. The advantage of this is that cash flow is directly linked to business expansion. This method is not suitable for all businesses and your bank will be able to advise you. Asset finance can be used to fund equipment purchases. This can help ease cash flow by spreading repayments over a period of time, instead of making a one-off investment.  

HSBC is definitely open for franchise business. Finance will be available to quality applicants who can demonstrate they have a good understanding of their chosen franchise model and the financials of their business. Ensure you conduct your research and are comfortable there is a need for your product/service and, working with your chosen franchisor, you will be able to build a successful and profitable franchise. 

For further information download HSBC’s comprehensive Starting a Franchise guide from www.business.hsbc.uk/en-gb/hsbc-franchising, call 0121 455 3438 or email franchiseunit@hsbc.com.