If you're considering becoming a franchisee, one of the first things on your mind will be how you are going to fund your venture. To help make life easier, we’ve provided some top tips for securing finance for your franchise.
It’s easy to see why so many entrepreneurs are drawn to the world of franchising. It’s a relatively safe business model which can be very lucrative for franchisees. You may be lucky enough to have savings that can be used to cover the franchise cost but for the majority of prospective franchisees, securing 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 get funding. Here's how you can boost your chances of getting that all-important investment to kick-start your franchising journey.
1. Consider low-cost franchise opportunites
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.
2. Look out for opportunites that offer funding
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 don’t provide the option to finance the total franchise investment but tend to vary anywhere between 15 percent and 75 percent of the amount required.
If your chosen franchisor doesn’t provide franchise options, the easiest and most reliable route is to contact the franchising department of a high street bank. But before we delve deeper into what this involves, let’s take a look at some things you need to bear in mind first.
3. Prepare your business plan
The business plan 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.
It should include financial forecasts, your background and your experience. You’ll 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, you’ll 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.
Some banks don’t look to fondly on business plans that use a generic template as it suggests that you haven’t put as much effort into it, so that’s something to keep in mind.
4. Consider your credit history
If you’ve got a bad credit history, it can cause problems with securing a loan and singing a lease for your business premises. If you do think this could be an issue for you, consult an expert, who will advise you how you can improve your credit score over time.
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- Franchising 101: The Official Franchise Start Up Checklist (Part 2)
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5. Seek advice from a professional
Before trying to secure finance from a bank, it’s a smart move to speak to an accountant. Banks are trying to make a profit at the end of the day, so while they can be very helpful, it won’t hurt to receive guidance from an impartial source.
6. Prepare to meet with a bank
Banks can fund up to 70 percent of the total set-up costs (however, this tends to be more like 50 percent for new franchises). You'll need to fund the remaining costs, so it’s worth considering how you’ll do this before meeting with the bank.
Most major high street banks have their own franchise departments that are accredited by the British Franchise Association (bfa). Including Barclays Bank, HSBC, Lloyds Bank and NatWest.
Although it might be tempting to choose your usual bank, you should shop around for the best loans and interest rates. A good way to do this is attending a franchise exposition, as there are often a number of bank representatives happy to have a chat with you about your options.
There’s also a chance that your franchisor has already established a relationship with a particular bank. Make sure you double check this before making your decision, because otherwise you might miss the opportunity to benefit from preferential rates.
>> Read more:
- 4 Reasons Why Investing in a Franchise Is Worth It
- Franchise Investment: The Good, The Bad and The Ugly
- Invest in a franchise or go it alone?
- 5 reasons to invest in a franchise
- Making your mind up: Top 5 things to consider before you invest in a franchise
- Reasons why you should consider investing in a new franchise system
7. Know what to expect
There’s no denying that meeting with the bank as a first time franchisee can be a nerve-racking experience. To give you the best chance of having your loans approved, you need to know your business plan front to back and be prepared to answer any questions they might throw at you. This is a quick rundown of some of the things banks will be looking for:
- Proof that your franchisor is financially secure and franchise units are successful
- Well-prepared business plan, with realistic financial projections.
- Your previous experience and expertise
- Contingency plan
8. Securing a loan with assets
For loans that exceed £25,000, banks will want some security, in other words, a guarantee that you are able to payback your loan. A common form of collateral is property. But if you don’t have assets such as this to secure your finance with, don’t worry, there are other options. The Enterprise Finance Guarantee was set up in 2009 by the Department for Business Innovation & Skills and means the government will guarantee up to 75 percent of your loan. This scheme applies to loans of £1000 to £1,000,000.
Use these tips for securing finance
If you aren’t already confident with the costs involved with setting up a franchise, we recommend you check out our complete guide. Also, you can read another one of our articles about sources of business finance to find out more about small business grants and angel investors.
Becky Martin, Point Franchise ©