Choosing to invest in a franchise is an exciting time. You've decided to become your own boss, and you've researched the franchise opportunity that's perfect for you. All you need to do now is raise some capital. But what sources of business finance are there if you're starting out?
Sources of business finance
Sources of finance for a start-up business
There are many sources of business finance for first-time franchisees. Unlike owners of traditional start-up businesses, prospective franchisees generally find it easier to obtain funding from banks. This is because an established franchise with a proven track record of success is viewed as less of a risk from a financial perspective than a business being built from scratch.
There are other sources of business finance as well as a bank loan though. Here are just two of the options you could consider.
Small business grants
Start-up business grants are available to fund entrepreneurs to get their new business idea off the ground. However, because little or no interest is required to be paid on grants, the competition to secure them can be fierce.
There are many different types of grants available that are offered from a range of sources, including the government, local authorities and charities. Unsurprisingly, specific criteria must be met for the award to be approved. This will be different depending on the grant but tends to be linked to improving the local community or economy as a result of starting the business.
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Angel investors are high-net-worth individuals who fund new business ideas similar to the investors on the TV series ‘Dragons’ Den’. These ‘angels’ tend to have a wealth of business experience and enough spare capital to invest in a new venture. This can be very rewarding for the ‘angels’, as they’ll expect a share in the business in return for the funding.
Unlike more traditional sources of business finance, very often, an angel investor will act as a mentor when you start your new business. As they have a stake in the company, they have a vested interest in it succeeding, so sharing their knowledge and experience can help in the early days.
To secure an angel investment, you’ll need to be proactive to ensure that those with the necessary funding know about your business concept. Do your research and shortlist the ‘angels’ that you think can add the most value to your business. When you’ve identified them, attend events where you know they'll be or contact them directly. They won't come looking for you, so you need to find them and share your ideas with them.
Sources of finance for small business
If, on the other hand, you're an existing franchisee and you wish to develop your business or expand your portfolio by becoming a multi-unit franchisee, your experience and success will go in your favour. You will have actual, rather than forecasted, financials to share with prospective lenders, so the barriers to obtaining funding are likely to be reduced.
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Perhaps one of the most common sources of business finance is a loan. As with any credit, you'll need to pay the money back to the lender along with interest. It's also likely that you'll be asked to provide a business plan to demonstrate how you expect your business to perform and how long it will take to break even.
Depending on the size of the loan, you may be required to take out a secured loan rather than an unsecured loan. This acts almost as an insurance policy for the lender because if you’re unable to keep up the repayments, you’ll be expected to sell assets so that you can.
If your business is performing well and you wish to invest in equipment, property or training to enable you to continue to grow, your loved ones may be in a position to help out. This is a great way to give your business a quick cash injection and allows your friends and family to play a crucial part in your business.
However, borrowing money from loved ones can also be very risky. It can be easy to fall out over money issues if your business runs into trouble at any point. For this reason, you should treat your friend or family member as you would any other lender. You can download free loan agreement templates from the internet, which will formalise the deal and cover both parties in the event of any disagreements.
How much do you need to fund your franchise?
Before you consider the best way to fund your business, you must understand the total amount you need to borrow. As a prospective franchisee, your initial concern may be raising enough capital to cover the franchise fee, but there are likely to be more costs involved with starting your business than the initial franchise fee.
You should also consider the amount of working capital you’ll need to keep your business afloat until it starts to turn a profit. There are also other expenses, including professional fees, insurance and rental payments on business premises.
Percentage from lenders
It should be remembered that most lenders will lend up to 70 percent of the total investment for established franchises and nearer 50 percent for new franchises. This means that the remaining amount needs to be covered through your personal contribution.
Always take time to thoroughly research and understand how much you need to borrow before you approach any lenders. Not having enough finance may mean that your business is put under unnecessary strain before it has had a chance to get off the ground. However, borrowing too much could result in the same outcome.
Benefits of franchising
Investing in a franchise does make this process easier than if you were looking to start an independent business from scratch. The franchisor should be able to help with the financial forecasts, based on the experience of other franchisees in the network running similar businesses to the one you’re looking to build. This will enable you to raise the right amount of finance and give lenders confidence that your projections are as accurate as they can be.
We now explore more benefits of franchising that you can take into consideration if you’re on the fence about starting your own.
10 benefits of franchising
- You can explore sectors you’ve not yet entered. Considering that many franchise opportunities don’t ask that you have experience in that industry, you don’t have to limit yourself to the type of careers you’ve led in the past. Franchising allows you to try something completely new and use your skills and passion to create a lucrative business you enjoy operating.
- Less risky option. When starting a business from scratch, there are many unknowns that entrepreneurs may not have planned for or be able to deal with. Buying a franchise drastically reduces the number of uncertainties. If you conduct thorough research and inspect the franchise agreement in detail, there shouldn’t be any nasty surprises around the corner. Also, the franchisor will have created a proven business model with tried and tested operational systems that have most likely been successful for a number of other franchisees. This again means that from the get-go, you have a better idea of what to expect and there is less chance of something going wrong, compared to independent start-ups.
- There’s an existing customer base. If the franchise already has a substantial presence in the UK, there should already be brand awareness among customers. With new businesses, this level of recognition can take many years to achieve. Having immediate customer recognition should help you become profitable much sooner.
- You get help with site selection. This is one of the most critical decisions involved in business ownership. The pressure of making the right decision can feel overwhelming. But, with the help of the franchisor and experts, you are in good hands and can trust their advice in choosing the perfect location. On top of this, support is usually provided with fitting out the new premises. The franchise team will help you maximise your investment by choosing the right fixtures and equipment.
- You can receive support from the other franchisees. Unfortunately, independent business owners often have to work through any problems that arise independently. This can lead to them feeling isolated and in a negative mental space. Luckily, with franchising, there is a team of franchisees who you can seek advice from and share stories with. The other franchisees should be happy to help, as after all, their success is influenced by your success.
Becky Martin, Point Franchise ©