The Guide To The UK Franchise Market

Financing Your Franchise

Financing the purchase of your franchise can be a difficult and bewildering process.

In an ideal world the cost of your franchise will be financed from savings. However in most situations this cash may not be available. It is also worth bearing in mind that if you do have these resources, they may be required to help you through the start-up period.

The Banks
The main source of finance for franchising is the major clearing banks, most of whom have specialist franchise departments. The banks will expect you to put in a substantial contribution yourself, this is normally between 30-50% of the total cost.

There are different types of finance that can be offered and often a package will consist of a number of different elements:

	A loan to cover your start up costs
	Leasing arrangements to cover equipment and vehicles
	Overdraft facilities to assist with cashflow

Sometimes you can negotiate a capital repayment holiday to assist in the early days but remember that interest is still being added all the time.

The banks will normally require security to cover the loan and will be subject to normal status requirements. Quite rightly the major factor for any lender is your ability to repay the loan. The term of the loan will not normally be longer than the term of your franchise contract.

Most Franchisors will have already dealt with these banks and may have made special arrangements and this is always worth checking as they have negotiated special terms based on experience.

Preparing Your Case
The banks will normally want to see a number of items before they will lend to you:

	Details of your current banking arrangements - statements etc
	A Business Plan and Cash Flow Forecast. Many Franchisors will provide this for you. Whilst this can provide a useful model, it is important that you prepare your own figures and that you understand them. Your research should show that the figures should also be realistic and achievable. Be prepared to answer questions as to how the figures are calculated. At the end of the day you have to be able to meet your commitments and you should monitor your performance regularly against the cash flow forecast
	Details of leases
	Copy of the Franchise Agreement
	Details of how much you want to borrow. It is important that you calculate how much you are going to need carefully. If you are going to make a loss in year one you have to have the necessary finance in place to cover it. If you have to keep going back to your bank for additional finance, they will gradually start to wonder about your ability to manage.
	Details of the security that you have to offer, this will normally mean a second charge on your property. Where you have no security you should ask the banks about the government's loan guarantee scheme. This will increase the amount that the banks will lend.

If You Get Turned Down
Sometimes the banks will be unwilling to lend to you. This may be for a variety of reasons and sometimes you will find that one lender will agree a loan whilst another will turn it down.

There are several reasons why you may get turned down. Some of these are as follows:

	Your personal credit rating - you may for example have had previous county court judgements etc. The lender should provide you with details of the source of credit information and you can ask them for a copy of the information and if it is wrong you can get it removed.
	Your lack of security to offer the lender. There is a special scheme called the loan guarantee scheme which some banks are involved in and is worth checking out, this is where the government provides additional security to your lender.
	Adverse information about the Franchise. Your lender may have adverse information about the franchise. e.g if they have a number of franchisees banking with them and a number are struggling, it would be wrong for them to lend to you. Due to confidentiality issue they are unlikely to be able to directly tell you this.
	Lack of information Your lender may have no information on the franchise operation. In this case it would be sensible to ask your Franchisor to supply the necessary forecasts and background information etc.
	Lending Criteria The lender may feel that you do not meet their overall lending criteria.
	Preparation Your lender may feel that you have not carried out sufficient research into your new business proposition.

If you are turned down by your own bank and you still want to proceed do not necessarily let this deter you. Listen to the reason why you have been refused the loan, learn from the experience and try again. Talk to your Franchisor and ask what help they can provide.

Independent Financial Advice
The banks are not the only source of finance and we recommend that it would be prudent to obtain specialist financial advice from a Independent Financial Advisor. This is useful because they will be able to provide an objective analysis of your financial situation and will have access to the whole of the financial market. e.g sometimes a re-mortgage at low rates could be arranged which will avoid the need for bank finance, provide lower repayments over a longer period and reduce bank pressures.

Many mortgage lenders are prepared to provide either a remortgage or additional lending for business purposes. If you have equity in your property this can be an excellent way of financing your franchise. The banks will require a second charge over your property therefore the security implications are the same.

There are a number of low fixed rates available and this form of finance is worth considering.

In addition if you do obtain finance it is well worth obtaining quotes for insurances from Independent Financial Advisors as many of the banks only operate through one Insurance Company.

We have negotiated a fixed fee based service with a number of Independent Financial Advisers. Click here to complete our short form and we will arrange for them to contact you.

Financing Your Franchise

Menu