Updated 13 November 2020
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.
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:
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.
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)?
There are a number of reasons why your franchise finance loan application could be rejected, including:
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.
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:
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.
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.
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.
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.
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