How to finance your franchise business

If you’re considering starting a franchise business, securing franchise funding from a bank will be one of the most important starting points. To do this, you’ll need to prove you’ve got what it takes to make your franchise a success.

Franchising is a more accessible route to business ownership for many, as you’ll be following a proven business plan developed by a well-established company. However, buying a ready-made business-in-a-box often doesn’t come cheap. The average franchise set-up cost is estimated to be around £40,000. And while it can be easier to secure a loan for a franchise than an independent business venture, you’ll still need to prove to prospective lenders that lending to you is a sensible decision.

What is franchise finance?

Franchise finance is a loan that helps you cover both initial and ongoing costs. It can either come from the franchisor themselves or, more commonly, from a bank in the form of a business loan. Without it, franchising wouldn’t be as accessible as it is today.

Starting a franchise can be a costly venture. Though it’s possible to invest in many franchises for as little as a few thousand pounds, your investment liabilities can spiral. There are several main costs you’ll need to cover when starting a franchise business, including:

• The initial franchise fee – This can range from hundreds of pounds to a million or more, depending on the brand
• Equipment – You may have to cover to cost of pricey equipment like machinery or kitchen equipment
• Premises – From rent to the cost of a fit-out, getting your location ready for business is one of the biggest expenses
• Your own living expenses – While the British Franchise Association states that 93% of franchises operate in profitability, it could take months to reach this point. You’ll need access to significant reserves of liquid capital to support you until then.

For example, McDonalds states its franchisees will need at least £100,000 in liquid capital and could spend in excess of £1 million on equipment and other essential aspects during their period as franchisee. Though you may set your sights lower than this, it’s a sobering illustration of what can be involved.

How can I successfully finance a franchise?

To improve your chances of securing finance for your franchise business, you need to show you’re serious about your new venture. Any good franchisor should offer advice about applying for finance, particularly if it’s happy to accept franchisees with limited or no prior experience as a business owner. Many will even guide you through the process.

If not, you’ll need to approach lenders yourself. You can check online what documents you’ll need to provide, which are likely to include the financial projections your franchisor has shown you. This information will show the lender that your chosen franchise has the potential to be highly rewarding and give them the confidence to lend.

One of the most crucial aspects of any business loan application is a solid business plan. Drawing one up can be a lengthy, tedious process, but it’s a vital tool for persuading any financier you’re worth lending to. Essentially, the business plan is the strongest way to show banks and other finance companies how viable your business is and exactly how you plan to build your franchise to offer the company a safe return on their investment.

Another key consideration is the legal structure of your business. Are you going to operate as a sole trader (you’re personally liable for all your business’s debts, profits and losses), or choose a more formal legal structure such as a private limited company (potentially reducing your personal financial liability)?

What could cause a franchise finance loan application to be rejected?

There are a number of reasons why your franchise finance loan application could be rejected, including:

• Poor personal credit history
• Your franchise’s legal structure (whether you’re operating as a sole trader, limited company or LLP)
• You’re joining a newly established franchise that has yet to reliably prove its viability
• Your projected turnover is deemed unrealistic
• The bank isn’t happy to lend you as much as you’re asking for
• Your business plan is poor
• You don’t have any collateral that can be used as security against your loan

How much will franchise finance cost?

It will depend entirely on the franchise how much you’ll need to secure in finance and the type of finance you choose. We’re going to take you through an example to explain how you can find out.

Let’s say you’re interested in a franchise that asks franchisees to pay a £20,000 franchise fee. That won’t be your total investment. In fact, depending on the sector of the business and how much is included in the franchise package, you may have to invest anywhere from £50,000 to £500,000 to cover the full cost of the franchise. Most franchises and high-street banks offer 70% funding to franchisees, meaning you’ll need to borrow up to £350,000 to start your franchised business.

Depending on your requirements, you could access an overdraft to help your business’s cashflow, purchase equipment through asset finance or choose a large, longer-term bank loan to cover a wide range of costs associated with your franchise.

The structure of your repayments will also vary. Some franchises may have developed a good relationship with a bank, such as HSBC or NatWest. Both have prominent franchise departments, meaning you don’t need to begin repaying your loan until you’ve been in business for a few months. Generally, your repayments will be taken by direct debit or standing order, as they would with any other kind of loan.

How might I spend franchise funding?

As we’ve explained, franchise funding is most commonly used to cover big expenses or to improve cash flow throughout your franchising journey. In addition to your franchisee fee, premises and working capital, you could use franchise funding for:

• Branded workwear
• Initial royalties (covering marketing, advertising and other aspects)
• VAT bridging
• Marketing (if your franchise doesn’t have a central marketing service)
• Initial staff wages until you begin turning a profit

Other hidden costs include business insurance. Depending on the type of business you’re running, you may need to take out a number of policies, including public liability, product liability, building and contents insurance, professional indemnity and employer’s liability insurance.

Do I need advice before seeking franchise finance?

It’s always advisable to get professional advice before starting your search for franchise finance. If you’re not sure about your profit projections and want to get an idea of what you could realistically afford in repayments, an accountant will be able to help. They can analyse the financial information your franchisor has given you and suggest which option or provider of finance is going to be your best route.

What are the alternatives to franchise finance?

If you’re not able to secure a traditional bank loan, overdraft or invoice financing, there are a number of other options that could help you realise your franchising dream.

• The Enterprise Finance Guarantee (EFG) scheme, which is run by the Department for Business Innovation and Skills. The EFG can guarantee up to 75% of your loan up to £1 million, making it a great option if you lack the securities required to get a loan.
• Local Enterprise Partnerships (LEPs), which were set to up to support local businesses across the UK. Currently, there are 38 operating across the country and the scheme has supported 196,000 businesses to date.
• BFA-approved grants, including ones offered by the Prince’s Trust, Virgin StartUp and Start Up Loans.
• Other government grants. The UK Government regularly introduces new grants to support businesses, so it’s worth checking on gov.uk to see what’s available in your local area.

How can I make my franchise successful?

Joining a franchise that is reputable is naturally going to give you the best chance at succeeding. Look out for franchises that are members of the British Franchise Association, either provisional, associate or full, as this is considered the franchising gold standard in the UK. But there are a few rules of thumb that will help you succeed when running any kind of business.

• Take advantage of all the help you can get, whether that’s from your franchisor or support team, fellow franchisees who were once in your position and the local business community.
• Find a method of organisation that works for you and use it to help you stay on top of client work, admin tasks, employee matters and your obligations as a franchisee. This could be a paper diary, virtual diary or hiring someone like a PA or admin assistant to keep you on track.
• Keep a close eye on your finances and try to balance cost and quality in every area from stock/supplies to staffing and premises.