You’ve done your research, weighed up the pros and cons and decided you’d like to run a franchise business - but how will you fund your new venture? Before you even approach any lenders, there are steps you can take to give yourself the best chance to secure the capital you need. Here’s our guide to franchise financing.
There are various payments involved in any franchise investment: the initial franchise fee, set-up costs, ongoing royalties and marketing fund contributions. And that’s on top of the working capital you’ll need to keep your business afloat until you start turning a profit.
Franchise financing can be overwhelming, but there’s plenty of help out there for those who’d like to become a franchisee. Thanks to the reliability of the franchise model and its proven success across the industries, many banks are willing to lend investors up to 70 percent of their initial payments.
Plus, some banks have dedicated franchise departments with experienced specialists on hand to provide helpful guidance and support.
How to finance your franchise business
Here are the eight steps to take to finance a franchise business:
1. Find out more about your options
There are a number of franchise financing options available to new investors, including:
- Business loans - Loans are the most popular way to fund a franchise business. Investors take out a sum of money and pay it back, with interest, within a fixed timeframe, which can last between one and 25 years. A fixed-rate loan can help with cash flow, as you’ll pay the bank the same amount every month. In contrast, interest payments with a variable-rate loan will fluctuate over time.
- Business overdraft - Overdrafts are easy to arrange and a great source of flexible finance to help manage variations in cash flow. However, you should only use them for short-term borrowing, as they can prove costly in the long term.
- Invoice finance - This type of funding is less popular and involves borrowing based on the invoiced payments owed to you. It can be complex, as the loan will fluctuate in size depending on how your business is performing and how much money you can afford to repay.
2. Create a business plan
Banks will want to see your business plan before they even consider lending you money. You must be able to show them how you’ll achieve your goals once your franchise unit is up and running. Putting pen to paper is your chance to set out your ambitions for your business.
Usually, your franchisor will be able to help you write your plan. They’ll provide detailed financial statements from existing branches and support you as you develop cash flow forecasts.
3. Understand your requirements
Before you step foot inside a bank, you must make sure you understand your finances. You’ll need to know how much you can afford to contribute to the franchise cost and how much you need to borrow.
Also, do the necessary calculations to work out how much money you’ll be able to repay to the bank every month, and how much you can afford in interest. Then, you’ll have a much better idea of the loan products you should be considering.
4. Talk to your franchisor
Franchisors are on hand to offer help and support before you become a franchisee. It’s in their interest to make sure everyone in the business network has the tools to succeed, so they should be willing to guide you through the franchise financing process.
Discuss the various funding options with your franchisor and take the chance to find out more about the process. They’ll probably be used to talking to people with limited entrepreneurial experience, so don’t feel shy about asking questions.
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5. Check your credit score
Although banks are more likely to approve loans for franchise businesses due to their comparatively low level of risk, they’ll want to make sure you have a good credit score. Many companies will be able to rely on their business score, but as your unit is still in the planning stages, lenders may look at your personal credit rating instead.
At this stage, it makes sense to check your personal score and take action to improve it if necessary.
6. Prepare your financial documents
As well as checking your business plan and credit score, banks will ask to see your financial paperwork when assessing your application. If you’re unable to provide documents for your own business unit, your franchisor may be able to offer examples from other nearby branches.
You may need to bring income and cash flow statements, balance sheets and financial forecasts. Banks could also ask for business tax returns, property leases and business licences.
>> Read more:
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- Thinking About Investing in a Franchise? Here's What You Should Keep Top of Mind
- How to Avoid Going Broke by Investing in a Franchise
- To Invest in a Franchise or Start Your Own Business, That Is The Question.
- 10 Pros and Cons of Investing in an Established Franchise
- Ready to Invest in Your Future? 5 Reasons Why Investing in a Franchise Makes Solid Business Sense
7. Compare banks and lending packages
Once you’ve reviewed your finances and compiled the paperwork, you’re ready to look at lending options. We recommend starting by reviewing lenders with specialised franchise departments.
Many of the main high street banks have franchising expertise and are accredited by the British Franchise Association (BFA). HSBC, Lloyds, Metro Bank and NatWest are all fantastic lenders for investors, as they’ll be able to provide valuable franchise insight.
At this point, you should also compare the lending packages. Check loan amounts and terms, as well as annual percentage rates (APR) and any penalties. Above all, make sure the monthly payments fit your budget.
8. Consult a franchise finance professional
If you don’t choose a lender with a specialised franchise department, you should consider consulting an independent financial advisor, ideally with experience in the franchising industry. They’ll be able to guide you as you make your final decision and help you avoid making costly mistakes.
Find out more about franchise investment
So, there you go: the eight steps you need to take to finance a franchise business. You can find out more about the process of joining a franchise and becoming a franchisee with our selection of business guides. We publish new articles every day to help would-be investors make the right choices.
Alice Tuffery, Point Franchise ©