Top tips for franchisees who need to secure finance

21/06/2018 08:00 | Financing your franchise

Franchisees who need to secure finance

Itís easy to see why so many wannabe entrepreneurs are drawn to the world of franchising. Itís a relatively safe business model which can be very lucrative for franchisees. For many, choosing to invest in a franchise is the ideal way to become their own boss while enjoying the security of working within an established business.

If you're considering becoming a franchisee, then your first responsibility will be to fund the franchise. You may be lucky enough to have savings which can be used to cover the franchise cost but for the majority of prospective franchisees, applying for finance is the only option.

The good news is that because the banks view a franchise investment as less risky than starting an independent business, it tends to be easier to secure funding. There are many things that you can do to improve your chances of getting finance agreed so here are our top tips to make sure you get the cash you need to get started.

Tip 1: Weigh up all your options

Even if you donít have adequate savings to cover the franchise fee and set up costs, there may be other options than applying for a bank loan. Before you sign of the dotted line, it's worth considering if finance is the right move for you.

It may be that you donít even need a loan at all. There are many low-cost franchise opportunities available to invest in starting from as little as £1,000. As long as you can cover your living expenses through the support of your spouse or family member, then you may be able to become a business owner without lending any money at all.

If you do need to rely on funding to cover the franchise cost, then you could look to your franchisor for help rather than your local bank. Increasingly franchises are offering financing for their franchisees to cover the franchise fee or equipment to help get their businesses off the ground. Generally, franchises donít provide the option to finance the total franchise investment but tend to vary anywhere between 15% and 75% of the amount required.

But if your chosen franchisor doesnít provide franchise options, probably the easiest and most reliable route is to contact the franchising department of a high street bank. Banks can fund up to 70% of the total set-up costs (however, this tends to be more like 50% for new franchises). You'll need to fund the remaining costs, so itís worth considering how youíll do this before meeting with the bank.

Tip 2: Be prepared

When youíve decided on how youíre going to finance your franchise business, itís time to create a business plan. This is an essential document that will help your lender to understand your financial position, your plans and how you're going to achieve your goals. Youíll need to develop a business plan even if you donít need finance.

Your business plan should include financial forecasts, your background and your experience. Youíll also need to provide information about where your premises are likely to be, or if your business will be home-based. Your business plan should contain a competitor analysis with details about how you're going to differentiate your franchise from other similar companies in your area.

Your franchisor should be able to help you complete most of the document, but when you meet with your lender, youíll need to demonstrate your understanding of how the business will work and perform. Your franchisor will also be able to assist with the preparation of your cash flow projections.

Tip 3: Know what youíre signing up to

Most franchises will provide you with an estimate of how much you can expect to earn after a certain period. This information will be based on actual earnings reported by the franchiseís existing franchisees, although you shouldnít assume that every franchisee is making this amount.

As youíd expect, the franchisor wants to make a positive impression and so will present financial information for their best-performing franchisees. You should also be wary of the phrase Ďup toí. Although this figure is achievable, itís probably at the top end which can only be accomplished if youíre willing to put in a phenomenal amount of time and effort.

This could involve longer hours and more significant sacrifices than youíre prepared to make. Before you make a franchise investment, you should have a clear idea of how much you want or need to earn and what it will take for you to achieve your goal.

And remember, although itís the last thing you want to think about before you even become a franchisee, you must consider what will happen if your business doesnít work out. Before agreeing to a finance plan or business loans, you need to carefully consider how youíll continue to meet your financial obligations if times get tough.

Tip 4: Understand the total investment cost

Many prospective franchisees only consider the franchise fee when theyíre looking to invest. Donít fall into this trap. The franchise fee is only part of the franchise cost. The total investment cost includes the expenses that youíll need to cover the set-up of your new business. These consist of costs such as leasing of business premises, purchasing equipment and buying insurance.

Youíll also need working capital. This tends to be one of the most overlooked elements when considering the cost of a franchise. Itís easy to forget that, just like any new business, it takes a while to build up a customer base and create a positive cash flow. Until your franchise is turning over a profit, youíll need working capital to fund business and personal expenses.

Tip 5: Seek advice

When you're assessing whether to invest in a franchise or not; it's a pretty big deal. Make sure you talk your decision through with your family members, friends, or a business mentor before you make up your mind. Very often you'll be too emotionally absorbed in the process, and it's good to consult others who aren't so involved in the decision-making process.

Itís also highly recommended that you seek advice from a solicitor that specialises in franchising to review your franchise agreement. Although itís unlikely that a franchisor will agree to make changes to the agreement, a legal advisor can help you to fully understand what your roles, responsibilities and obligations are as a franchisee.
 

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