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 savings 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.
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. Certainly a lenders previous experience in working with a franchisor and it’s franchisee will be a major factor in agreeing finance
There are different types of finance that can be offered and often a package will consist of a number of these different elements:
Business Overdraft
Flexible borrowing often used to help with day to day cash flow normally easy to arrange and the advantage is that you pay interest only on the amount you are borrowing at any time.
The disadvantage of this type of finance is that flexibility works both ways and banks have been known to reduce overdraft facilities when times become tougher. They call it prudent banking but it can cause difficulties.
Small Business Loan
Normally for amounts up to £25,000. Repayments and interest rates are fixed for the term of the loan. Terms of loans are normally up to 10 years but will not exceed the term of the franchise agreement.
Flexible Business Loan
For loans over £10,000 and with a choice of fixed or variable rates. Repayment periods up to 15 years and interest can be paid monthly or quarterly.
Enterprise Finance Guarantee
A source of borrowing to help you expand your business or increase your working capital. There is a government guarantee which covers75% of each loan that qualifies. This scheme is designed to encourage the banks to provide loans where there is more risk or extra security is needed.
Invoice Financing
Improve your cash flow by releasing cash from invoices with up to 90% of the invoice value released the next working day. This is often known as factoring and the factorer will often issue and run your invoicing for you.
Commercial Mortgage
These are used in conjunction with property purchases or redevelopment of existing premises.
Business Credit Card
Up to 56 days interest free credit can be used to ease cash flow.
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.
Preparing Your Case
The banks will normally want to see a number of items before they will lend to you:
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Details of your current banking arrangements - statements etc |
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Details of your previous employment history and your skills set. Do you have industry expreriance or relevant transferrable skills. |
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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 are 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 once you are up and running you should monitor your performance regularly against the cash flow forecast. |
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Research into the area that your business will operate in. You may have lived there for some time but you will not necessarily know it as a business area. |
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What is the demand for your business in your area, how is it being served now and what is your plan to win market share. |
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Research into your competitors products, services etc. How do you compare, where is your advantage |
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Details of leases that you will be responsible for. |
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Copy of the Franchise Agreement |
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Details of how much money you will need to set your business up. This will include all the set up costs of the franchise including franchise fees, marketing costs, costs related to premises and refurbishment, opening stock, working capital and the cost of recruiting staff and legal costs.
The banks and other lenders will expect you to really understand these costs |
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Details of your personal expenditure, mortgage repayments, hire purchase and day to day living expenses and how you intend to fund them. |
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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.
If you are turned down by your own bank and you still want to proceed do not necessarily let this deter you. Many major businesses have struggled to get finance and some of these have been tiurned down several times before securing funding.
Look carefully at the reasons that you have been turned down. Learn from them, adjust the plan as far as you can and talk to your Franchisor and ask what help they can provide.
There are several reasons why you may get turned down. Some of these are as follows:
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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. |
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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. |
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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. |
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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. |
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Lending Criteria
The lender may feel that you do not meet their overall lending criteria. Banks have tightened their lending criteria and asked for more security over the last couple of years. |
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Preparation
Your lender may feel that you have not carried out sufficient research into your new
business proposition. |
There are a surprisingly large number of banks with different lending criteria. If you have done your research, listened to the reasons why you have been turned down but still believe, go for it, approach other banks and alternative lenders.
Alternative Lending Sources and 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.
 Other Banks
There are a surprisingly large number of banks with different lending criteria. If you have done your research, listened to the reasons why you have been turned down but still believe, go for it approach other banks and alternative lenders.
Independent Financial Advisors
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. You may have life policies or savings plans that can be utilised.
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.
Re-mortgaging
Sometimes a re-mortgage at low rates could be arranged which will avoid the need for bank finance, provide lower more secure repayments over a longer period and reduce bank pressures.
Many mortgage lenders are prepared to provide either a re-mortgage or additional lending for business purposes. If you have equity in your property this can be another 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 as part of the package but of course remember affordability is the key. |
