Franchise Financing: Which Option is Right For You?

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franchise finance

While there are many low-cost franchise opportunities out there, many investors need to borrow money in order to kick-off their business and keep it running. The world of franchise financing can be complex to those who are new to it, so we’ve created this guide to help you identify the right option for your business.

You’re not alone if you feel overwhelmed by the prospect of securing franchise finance. Completing the application and qualifying stages alone can be tiring, but with a bit of insight into the world of franchise loans, you can get off to a confident start. 

Franchise financing options

We’ve created a run-down of some of the best types of franchise finance, whether you’re just setting up your business or looking for a cash injection to cover unforeseen expenses. 

Bank loan

This is the most popular way to fund a business venture. Bank loans can help you ease your cash flow during challenging periods or provide big pay-outs when you need to finance one-off expenses. 

Loans come with fixed or variable rates – both give you the opportunity to borrow the money you need for your franchise and pay it off over a specified period. With a fixed rate loan, you pay back the same amount of money every month. With a variable rate loan, however, the repayments change as the market interest rates fluctuate.

When applying for funding, a bank may ask to secure your application against a form of security. You could, for example, provide a legal charge over your family home, if there’s sufficient equity available. 

If you cannot provide adequate security, the bank could use the Enterprise Finance Guarantee (EFG). The Department for Business Innovation and Skills (BIS) guarantees the lender for 75 percent of the loan. The lender then pays an arrangement fee, interest and a payment of two percent per year to the government for acting as a guarantor on the loan’s remaining balance. 

Short-term loan

You may have heard short-term finance described as ‘pay-day loans’. This type of funding can provide a cash boost when you need money to cover a limited period. It can be a risky way to access finance, as the interest rates are usually high, but applicants can side-step much of the admin associated with long-term bank loans. 

Often, it’s safer to reserve this type of finance for times when you’re confident you’ll be able to pay off the loan quickly. 

Overdraft finance 

Overdrafts are generally useful for short-term borrowing. If you invest in a low-cost franchise and have another source of funding to cover most of the set-up cost, you could benefit from the flexibility of an overdraft when it comes to repayments.

However, higher interest rates make this franchise finance method a more expensive way of borrowing money than a loan. Also, the bank has the right to withdraw your overdraft facility at any time, making the stability of a loan a more attractive concept for long-term borrowing.

Invoice finance

This type of finance can be more complicated than a loan or overdraft, and is often an expensive way of financing a franchise. It involves borrowing on the amount of invoiced payments owed to you by selling invoices to individuals or businesses willing to pay you for them. The size of the loan depends on how your business is performing and how much is being repaid. 

Asset finance

If you need to invest in a new vehicle or piece of equipment, for example, asset finance could help you cover the cost. With this franchise financing method, you’ll release money from assets you already own or use them as security against a business loan from an asset finance lender. A wide range of items are classed as assets, from kitchen appliances to a fleet of vans. 

Depending on the asset finance contract you sign, you may end up covering the entire cost of the item and eventually take it as your own. Alternatively, you’ll effectively rent the product for a given period and return it at the end of your agreement term, with the chance to move on to a newer version. 

How to finance your franchise 

1. Calculate how much money you need

Franchisors can help you with this step by providing statements and forecasts from existing franchise units in the network. Unlike entrepreneurs who start an independent business from scratch, franchisees have the chance to gauge their financial obligations before they get started and plan for potential complications.  

2. Approach banks and lenders

Because franchises are considered to be a relatively safe bet compared to start-ups, banks are often willing to lend up to 70 percent of the total set-up cost. Many have a specialist franchise department, so be sure to make use of it if you consider taking out a loan. 

The following high street banks are accredited by the British Franchise Association:

  • Allied Irish Bank (GB)

  • Barclays

  • HSBC

  • Lloyds Bank

  • Metro Bank 

  • NatWest

3. Write a business plan

Most lenders and franchise financing providers will want to see a business plan before they agree to part with their money. The document will help them understand your current position, your business objectives and how you intend to achieve them. 

But even if no one asks to see your business plan, taking the time to create one will help you thrash out your ideas and uncover any potential problems. 

4. Consult legal and finance specialists

No matter your situation, we strongly recommend you consult experts before signing any binding contracts. Legal advisers and finance consultants will be able to review your franchise and lending agreements and help you understand your obligations. 

More information on running a franchise business

If you’ve still got questions on how to finance your franchise, take a look at our guide to securing bank loans, Franchise Financing: 8 Steps For Getting Help From A Bank. You can also find extra guidance by typing a specific topic into the search box and browsing relevant articles. 

See our full selection of franchise guides to find out more about the subjects everyone is talking about. 

Alternatively, you can discover the franchises currently looking for new investors by using the menu on the left.

>> Read more articles on the Finance sector

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