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When considering franchise financing, the first rule is to work out the total costs. It’s common for aspiring franchisees to quote the franchise fee as the total start-up cost. However, a franchisee will also require some level of working capital and will need to cover such things as VAT and also professional fees.
Once the total start-up commitment has been accurately calculated, though, these are the common sources of franchise funding you may be able to call upon.
Your franchisor should always be the first source you approach about funding. They can help with many typical start-up costs.
In addition, though only a few may be able to offer more substantial direct help, most will have close ties with other funding sources.
In essence this means that via a referral you may be able to secure preferential rates and more advantageous terms with certain banks and other franchise lending institutions.
This will invariably be a cheaper option than simply approaching standard high street lenders for yourself.
If your franchise is with a well-established business with a strong business model, many UK banks will be happy to accommodate your loan requirements.
It is quite common for banks to lend up to 70% of the total start-up costs. Your loan term will be linked to your franchise arrangements.
So if, for example, your franchise agreement is for an initial term of five years, then your loan term will cover the same period.
Given that you have franchisor support, banks may be able to offer their full range of financial support e.g. a business overdraft, small business loans, a flexible business loan, commercial mortgage terms and a business credit card.
If you are fortunate enough to raise your total funding need from this source, your commitment is essentially personal.
However, it’s not just good business practice to draw up a formal agreement covering such things as the loan term and rate of interest.
If your franchise business should happen to get into difficulties, a written agreement stipulating what your backers can expect in the way of a return is a sensible way to limit any damage to personal relationships.
Other specialist lenders providing franchise finance will have similar criteria to bank lenders.
Once more, the larger and stronger the parent franchise model, the better the terms you will be offered – provided you have good credit references.
There may also be specific franchisor/lender links offering improved terms, and many of these specialists may be slightly cheaper than banks, and/or may offer a slightly more attractive overall package.
Most sources of finance, and almost certainly your franchisor, will expect you to be making some kind of personal investment in your proposed franchise business.
In practice, the level of financial support you are offered by various commercial lenders is likely to hinge on a number of factors.
One important feature is the calibre of franchise brand you choose.
If it’s an established brand, lenders will expect you to find at least 30% of the franchise set-up costs from your personal savings. And where it’s a new, or relatively minor franchise brand, this personal investment requirement will be at a higher percentage.
Sources such as the government-backed Start Up Loans Company may be able to provide unsecured loans of up to £25,000.
These are available for applications from small franchise enterprises supported by a strong business plan. Some large community/regional schemes can also offer loans on preferential terms.
By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and likeminded companies.