Raising money for any business venture can be stressful, but…
Financial institutions have long supported the franchise sector in the belief that franchising is generally fairly secure and doesn’t suffer the high level of closures and liquidations evident in the ‘independent sector’.
Funding is available.
Buying a franchise is a serious business and often requires a significant financial commitment. That said, raising finance as a prospective franchisee is much easier than raising investment to start a business from scratch. Most established franchisors will have negotiated funding arrangements with the major banks and several banks have a specialist franchise department to deal directly with prospective franchisees.
In addition, there is the option of the Start-up loans Company which is a government backed lending mechanism for new businesses through the British Bank.
So, the good news is there is funding available out there.
In-built advantages.
Furthermore, being a franchise brings several advantages.
One of the key benefits of franchising is that the banks look at you more favourably as a borrower, compared with someone starting up on their own.
To this end, for an independent start-up the banks will generally lend up to 50% of the total cost but for an established and proven franchise then they will lend some 70% of the total cost.
Terms and rates vary of course between the banks – though in my experience they are all try to be competitive in this modern age.
Banks particularly have specialist franchise staff who often know the franchise concerned and may have dealt with the brand in the past and even provided finance for another franchisee in the network – so there is understanding and knowledge.
The franchisor should have built up a relationship with the bank and can therefore introduce you to the right people to cut down on time and administration (and so hopefully reduce your stress levels!).
The franchisor should also know the process required to get funding.
Certainly, you can’t just walk into a bank and walk out with a loan – there is a process involved and the bank will want to see your commitment to the business as well as details of your own assets and every lending institute will demand you put together a comprehensive Business Plan.
Again, the good news is that your franchisor should be able to help you with this.
I recommend that you contact at least two banks, and again your franchisor should be able to give you contact details and arrange a meeting with their franchise specialist.
The level and depth of your preparation and how well you present yourself will make a difference when you see the bank and for me a professionally prepared Business Plan is MANDATORY.
Warning:
The first thing you need to consider is how much money you think you will need, and whatever that is I would ADD three to six months of working capital to the overall cost.
This will raise the total amount of money you need to pay back but it will ensure you have the funds to get the business through its early growing pains.
Your commitment.
Whilst the banks are keen to lend to the franchise community you as the franchisee will also be called upon to invest some of your own money. It is important therefore that firstly you have liquid funds available and secondly that you do not overstretch yourself.
Franchise businesses have a good track record of success. However, no-one can forecast for certain the performance of the business in the future – or indeed your own commitment and if you do not have a safety net then you can easily find yourself in difficulty.
Talk to the franchisor.
You need to be honest with your franchisor about the source of the money. There is no value in telling the franchisor that you’ve got ‘X’ amount in cash when in fact you’ve taken a bank loan for that amount and are paying high interest charges.
If the franchisor doesn’t know then they can’t help or advise.
If you do your due diligence and work with your franchisor, raising capital for that new outlet should be a comparatively stress-free experience.