Here’s the scary part: raising the money to buy and run your franchise.
It needn’t be so daunting. Our straightforward breakdown of what’s important in the process will give you grounding.
There are five questions to ask yourself before you approach banks or other finance providers:
1. How much can you afford to invest in the business? Have you any savings? Can your family and friends help?
Take independent advice from a solicitor before you provide any security
2. What will the franchise cost to buy and get up and running? Include in this the initial, one-off fee, any premises you need to buy, the costs of buying equipment and the cost of recruiting whatever staff you will need.
3. What are the ongoing costs of the business you are buying likely to be? Paying staff, buying stock, covering the costs of wear and tear on equipment, paying taxes, paying any regular management fees to the franchisor. Franchisors should help you come up with a breakdown of the initial and ongoing costs you need to cover.
4. Work out your ongoing personal expenditure – what you need to take out of the business to live. List all your living costs – mortgage, bills, food, loan repayments, etc.
5. Having assessed these factors, most prospective franchisees will need a loan. Against what can you secure your loan? Equity in your house? A life insurance policy? Equity in an existing business?
Take independent advice from a solicitor before you provide any security.
If you do not have adequate assets to provide as security then place an advert on BusinessesForSale.com’s Finance Wanted section. Alternatively, the Government’s Small Firm Loan Guarantee Scheme can help.
The business plan
If you go down the route of approaching the banks, prepare a business plan, which will incorporate information covered in points 1 to 4. This is a prerequisite to getting a loan from the bank. Your franchisor should help with this.
Projected cash flow forecasts are of particular interest to the bank, and you will need to prepare forecasts for the first two years. They will want to know exactly how you arrived at these projections, what they are based on, and also what turnover is needed to break even. Your franchisor should help you prepare cash flow forecasts.
If you are buying an existing franchise business then the bank will want to know about its financial performance. To this end you should provide details of its accounts for the past three years.
Before you present your business plan to the banks, you should seek advice from a British Franchise Association-affiliated accountant to ensure that there are no mistakes and that it makes sense from a financial perspective.
How much they will lend
You must convince the banks that you can afford to provide at least 30% of the capital. This percentage goes up the more the bank perceives that the franchise is likely to fail. They will want to know what the regional and national competition is like in your chosen sector. And they will want to know if there is enough demand for your product or service for you to meet repayments. Because of this, banks like established, well-known, reliable franchises. They are likely to lend 30% of the start-up costs, at most, for new franchises.
Put simply, the banks will assess you according to:
- The total cost of buying and running the franchise for the loan;
- The percentage of the capital and personal living costs that you can provide personally, without the help of the banks;
- How established, how reliable, and how reputable your brand is. How confident are you that you can make a consistent profit out of the goods or services that you sell?
Have you got what it takes?
Another element in the bank’s decision as to whether they will sanction a loan is your reliability as an individual. To this end, they will conduct a background check on you, covering your employment history, qualifications, previous business experience and any other aspects that are relevant to your suitability to running a business in general, running a franchise, and working in your chosen industry.
The bank will also want to know what use the money will be put to. Think about how much will be spent on premises, equipment, staff and training and how each item of expenditure will benefit the business.
Repayments
What sales revenue do you need to make each month to reach break-even point? Is this realistic?
Establish what assumptions are built into your forecasts for cash flow and how you can mitigate against these assumptions being false – i.e., do you have a contingency plan for when things go wrong?
Interest rates and fees
Obviously the size and term of the loan are determining factors for interest rates.
Banks will also decide the interest rate according to perceived risk – how likely they are to get their money back. Again, a well established franchisor will be beneficial here. And the greater the value of the security on your loan is, the lower the risk, and therefore the lower the interest rates will be.
Some of the larger, more established franchisors have special finance schemes. A fee may be levied with such a scheme, however.
Types of finance
You need to decide what types of finance you wish to use: a loan, an overdraft, credit cards, or a package of financial services. The bank can advise you on the option that best suits your circumstances.
Loans are usually used for the purchase of assets, such as property and vehicles. They are usually repaid over a long period.
Overdrafts and credit cards are used usually for keep to sustain cash flow – pay for ongoing costs such as paying staff and buying stock – which of course is absolutely vital to the survival of your business.
Choose your bank carefully
Five banks with dedicated franchise teams are affiliated with the British Franchise Association. They are: HSBC, NatWest, Lloyds TSB, Bank of Scotland and The Royal Bank of Scotland. Compare their interest rates. Some might offer a period of free banking.
