How to Buy a Franchise with a Limited Budget

10/05/2018 08:00 | Start a business

Franchise on a budget

Have you always dreamed of being your own boss but are afraid that you wonít be able to afford the costs involved? While itís true that the upfront costs of starting a franchise can be significant, it doesnít mean that itís impossible to become a franchisee on a limited budget.

What can you afford?

The first step to buying a franchise is to have a full understanding of how much you can afford to invest. Write a list of all your assets and liabilities to determine your net worth. Be honest with yourself. Misjudging your assets or underestimating your liabilities could result in you appearing to be in a better financial situation than you actually are. This will come back to bite you further on down the line.

The next stage is to seek professional advice from a financial advisor that specialises in franchising. They will help you to work out how much you can afford to contribute towards the cost of your preferred franchise. Itís likely that youíll have to borrow the rest unless youíre considering low-cost franchise opportunities, but you will be expected to make a minimum investment towards the franchise costs.

Franchise costs

Donít be fooled into thinking that the franchise fee is the only cost youíll have to cover when you become a franchisee. The franchise fee is basically a reimbursement for the franchisor to cover the cost of recruiting and training you but there is so much more to getting your business off the ground.

The franchisor should be able to give you an idea of the total start-up cost for your franchise. This includes the cost of business-related expenses such as the purchase of equipment or stock, rent for business premises and insurance. Youíll also have to factor in the cost of professional fees for accounting and legal advice.

Once your franchise is up and running, there are likely to be ongoing costs to pay too. Most franchises charge a royalty fee to contribute towards the upkeep of the franchise system and the expense of providing you with ongoing support. Some franchises also expect a marketing fee which contributes to nationwide brand-level advertising campaigns. Both of these payments are usually calculated as a flat percentage of your gross sales.

Don't be too disheartened though. Certain franchises have little or no overheads, so the start-up costs are minimal and youíre able to make a profit more quickly. Also, not all franchises charge royalty and marketing fees, or some waiver them for the first couple of months until youíve become more established.

It doesnít matter how much your new franchise business costs though, you should always have access to a reserve fund. Itís advisable to have adequate working capital to fall back on in case your business takes longer than anticipated to break even.

Borrowing money from the bank

Chances are youíll need to get a loan to cover the fees required to become a franchisee. The good news is that because franchising is considered a safer route to business ownership, there's a higher chance that you'll be able to secure the funding you need from a bank.

If youíve chosen to invest in a well-established franchise with a proven track record of success, you should have no problem borrowing up to 70% of the total start-up costs including any working capital requirement. For newer franchise businesses, the amount you can borrow may be reduced.

Regardless of the amount the bank is prepared to lend, youíll need a robust business plan to secure funding. The franchisor should be able to help you prepare much of the information that the bank will want to review.

Consider low-cost franchise opportunities

Low-cost franchise opportunities are a great way for entrepreneurs to start their own business without breaking the bank. There are many advantages to starting a low-cost business including less debt, faster profitability and easier scalability. Just remember that being able to afford a franchise isnít reason enough to buy it.

Having said that, there are some fantastic franchise opportunities which may suit you perfectly and have the added benefit of being reasonably priced.

Home-based franchises

Not only does working from home give you more flexibility, but it stands to reason that itís significantly cheaper than renting office space too. Youíll have already factored the cost of your heating and electric into your regular monthly outgoings, and so there are no additional business expenses to pay. They tend to be the most budget-friendly of franchise opportunities as they have a lower entry fee and less requirement for working capital.

Van based franchises

Van based franchises are growing in popularity and offer lots of advantages for those looking to enter the franchise market. You can benefit from lower overheads, start-up and ongoing costs when you invest in van-based franchises, as opposed to operating from bricks and mortar premises. This can make this type of business very appealing, particularly for first-time franchise owners.

Part-time franchises

If youíve already got a full-time job yet desire extra income, buying a part-time franchise is an exciting alternative to getting a part-time job. Not only does running a business on the side mean earning some extra money, but it also offers options for the future. If your franchise becomes a success, many part-time franchises give you the opportunity to grow at your own pace and become a full-time franchise, therefore, enabling you to give up the day job. Also, as most part-time franchises are home-based, you can benefit from the lower initial investment and overheads.

A limited budget doesnít mean that you have to delay or give up on your dreams of becoming your own boss. By choosing the right financing options and selecting the best franchise opportunity to suit your budget, you can become a business owner now and take control of your future.

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