How to Overcome the Challenge of an In-Debt Franchise

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Many people start running a franchise business to gain security and stability. But unfortunately, no entrepreneur is immune to financial difficulties, and some business owners find themselves in sticky situations through no fault of their own. So, we’ve created a practical guide to handling in-debt franchise businesses, whether you’re a franchisee or franchisor. 

Are you struggling to pay invoices or chasing clients for payments? Perhaps you’ve noticed a decline in sales or an increase in employee turnover. Spending more than you bring in can quickly lead to debt problems, but recognising the signs and taking early action could help you rectify the problem before it’s too late.

How to get your franchise business out of debt

Here are some tips for getting a franchise business out of debt if you’re struggling to generate capital: 

  • Work on your business, not in it - Both franchisees and franchisors can fall into the trap of working too many hours ‘inside’ their business. Ask yourself whether you spend the majority of your day on-site, supporting employees, carrying out urgent or specialist jobs or interacting with customers. If the answer is yes, you might want to think about taking a step back, delegating tasks and dedicating more time to focussing on growth strategies.

  • Get organised - Most entrepreneurs will say they’re fairly organised, but you need to be 100-percent focussed and systematic when it comes to managing finances - and tax in particular. Poor organisation is the reason for many business failures, so make sure you understand all your various tax obligations and put aside enough each month to pay your HMRC and supplier bills.

  • Review the market - Things may have changed since you first launched your business, so evaluate the industry and the regional market. If you’re a franchisor, analyse your competitors and adapt your model to better satisfy consumer demand. If you’re a franchisee, take advantage of any additional revenue streams offered by the franchisor, such as e-commerce sales.

  • Scrutinise your budget and bank statements - You should be aware of the payments you’re making, but it can be useful to go over your statements with a fine-tooth comb and find ways to reduce your expenses. Simple changes like switching to a more economical energy tariff or reducing the number of shop-bought lunches you eat could make a world of difference. 

  • Prioritise profitable revenue streams - Take some time to review your business model and identify your most profitable products and services. When you’re dealing with an in-debt franchise business, it’s better to put effort into making sure your most productive avenues are performing well, rather than juggling several underperforming services. 

  • Network - Even if you’re already working 60 hours or more per week, taking time out to meet other entrepreneurs could pay off in the long run. Talking through your problems with people who have already overcome challenges may help you identify solutions, and you might even gain some new perspectives and long-term collaboration partners.

  • Talk to your lenders - If you’re in the process of settling a loan, it might be worth renegotiating your payment plan. Banks and other lenders don’t want to lose clients or consult a collection agency if in-debt franchises and businesses go bust, so they’re often willing to restructure contracts. You could ask for lower admin fees or interest rates, or a longer repayment window.

  • Explore grants - When you’re struggling with an in-debt franchise business, the idea of receiving a lump sum of money with no repayment obligations might seem too good to be true. But grants can offer real support. Do some research into funding options provided by both national and regional economic groups, as well as non-profit and non-government agencies.

  • Ramp up your debt collection efforts - Clients who are slow or unable to pay invoices can have an extremely damaging impact on your company’s cash flow. Owners of in-debt franchise businesses need to crack down on the issue, while having compassion for any clients who may be struggling themselves. Try shortening your repayment window or introducing discounts or incentives for clients who settle up quickly. 

  • Make it easy for clients to pay you - If your payment methods are overly complicated, you’re adding another layer of effort for time-poor clients. Introduce several different ways to pay, such as a website payment portal and direct bank transfer options.

Consider failure as nothing more than an opportunity to reflect and adapt. Where did you go wrong? What can you do differently? Learning is a part of the trade and failure is a tool for refinement.

What to do if your franchise business is in debt

Here are a few options to consider if you’ve pursued the avenues above and still have an in-debt franchise business:

1. Consider invoice financing - This process involves paying a lender a small percentage of an invoice owed to you. They then pay you the remainder and take on that debt for you. It’s a great way to transfer the burden to an external party and generate immediate capital.

2. Explore HMRC’s monthly payment plan - If you’ve already missed a tax payment deadline or you know you won’t be able to make it, HMRC may let you pay your invoice in monthly installments. You must set up the plan within 60 days of the deadline, and you’ll only be eligible if you owe less than £30,000 and have no other tax debts.

3. Use a Company Voluntary Arrangement (CVA) - If your in-debt franchise business becomes insolvent, you can pay an insolvency practitioner to create an ‘arrangement’ with creditors, so you can repay your debt within a given timeframe. When three quarters of the creditors agree to the plan, it is approved.

4. Execute a partial liquidation - Many in-debt franchise owners are nervous about liquidation, as it usually ends in the business’s closure - but a partial liquidation just involves selling off some of its assets. It’s a safe way to generate capital without going into even more debt. 

5. Go into administration – Large companies like franchises can appoint an insolvency practitioner to try to avoid liquidation by applying to the court for an administration order. During this process, the business is protected from any legal action taken against it.

Overcoming franchise financial problems

Struggling with debt as a business owner can be incredibly demoralising, but you can recover from it. Even if you’re forced to close your doors, there’s no reason why you can’t see success in the future

You can find more guidance right here at Point Franchise - just use the search box to find articles on surviving economic crises and other challenges.

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