Franchise Finance: How Do You Get it The UK?

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franchise finance

Originally uploaded on 05/09/2017. Updated on 14/04/2019.

The ability to use an established business model and benefit from the franchisorís support are well-known advantages of the franchising system. However, there are even more advantages when it comes to financing a franchise unit.

Firstly, franchisors can draw from their experience with previous franchisees to provide a rough idea of the potential costs involved in a franchise. Unlike those who start an independent business from scratch, franchisees have the chance to foresee costs, minimising the risk of running out of money over time. Also, when funding from external sources is required, established franchises are thought to be a safer investment than independent start-ups; therefore, franchisees are more likely to be able to secure business loans.

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Franchise Finance in the UK

Before you even consider funding, itís important that you identify the right franchise for you. This can take a lot of time and effort, but it is a vital step to ensure that you get the best financial outcome in the long run. Once youíre happy with the business youíve chosen and youíve successfully applied to become a franchisee, you need to think about finding the money youíll need for your investment.

So, how do you get finance to start your franchising business? The first stage is to calculate the total amount of money you will need. Franchisors can offer information on the rough costs involved, but many franchisees lack in-depth knowledge of the types of fees they will be required to pay. Also, you should remember to consider elements like working capital and professional fees when setting up a franchise.

Because franchises are considered to be a relatively safe bet compared to start-ups, banks often fund up to 70 percent of the total set-up cost. Of course, the remaining capital will need to be raised elsewhere. It is important that prospective franchisees have a clear idea of where this money will come from before they meet with a bank to discuss a business loan.

Many banks have a franchise department that is particularly suited to franchise-related enquiries Ė be sure to make use of this. The following high street banks are accredited by the British Franchise Association:

  • Allied Irish Bank (GB)
  • Barclays
  • HSBC
  • Lloyds Bank
  • Metro Bank plc
  • NatWest

When youíve identified your preferred bank, you should start building up your business plan. This will help the bank to understand your current position, your business objectives and how you aim to achieve them.

Bear in mind that you will need to compile a business plan even if you donít need to borrow money. Ultimately, even if no one asks to see it, a business plan encourages you to lay out your intentions clearly and could flag up any potential issues.

A business plan is an official declaration of your goals and include details about you and your professional experience. You should describe how you intend to fund the franchise and where your premises are likely to be located Ė if you donít decide to work from home. Also, who would your competitors be and how can you differentiate your business from theirs?

Your franchisor can help with questions like this, but you must be able to answer them confidently during your meeting with the bank in order to get the most out of the session.

Finance Options to Help Your Franchise Launch

There are different types of finance you could take advantage of for your business venture. It will be beneficial for you to have a basic understanding of each before you decide on your finance solution.

Loan

This is the most popular way to fund a business venture. Loans come with fixed or variable rates Ė 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.

Overdraft

The use of overdrafts is generally better suited to 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 an overdraft offers when it comes to repayments.

However, higher interest rates mean that this could be 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 method of financing a franchise. Invoice financing 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, therefore, depends on how your business is performing and what is being repaid.

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 thereís sufficient equity available). If, however, this is inadequate, the bank could think about using the Enterprise Finance Guarantee (EFG). The Department for Business Innovation and Skills (BIS) guarantees the lender for 75 percent of the loan. The lender will be expected to pay an arrangement fee, interest and a payment of two percent a year to the government for acting as a guarantor on the remaining balance of your loan.

Conclusion

No matter your situation, it is strongly recommended that you consult a legal advisor who specialises in franchising and is affiliated with the British Franchise Association to review your franchise agreement. This way, youíll know that you are in the best possible position to start your franchising journey.

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LEGAL ISSUES IN FRANCHISING
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