Should You Borrow to Buy Your Franchise?

There are significant benefits to obtaining money from a bank to purchase your franchise. Chris Roberts explains

It’s not uncommon for a new prospective franchisee with just enough cash to decide to use their own money and not borrow to buy their franchise.

This may be because they don’t want to pay fees and interest, because they don’t think the banks are lending - believe me, they are when they’re presented with a viable proposition backed up by a professional business plan - or because they simply don’t want the hassle and fuss.

Bad decision

This is, in our view, likely to be a bad decision because while things may carry on in a straightforward and unspectacular way, there are two other possible alternatives - one good and one bad. First the bad one.

In these somewhat uncertain times, it’s possible that trading may not be as good as was originally expected and therefore you could start making losses and running out of money.

An approach to a bank at that stage, where losses are being made and the business performance is well off its planned projections, will almost certainly be unsuccessful. The business could easily fail at this stage because of a lack of cash.

In reality, it would be much better to request a loan at the outset, say for 50 per cent of the total amount required, when everything looks rosy and the business plan demonstrates viability because the problem has not yet occurred. Therefore, when and if the problem does occur you have your own safety net, which you can use to get you through your sticky patch.

Good alternative

Now the good alternative. Things may be going really well for you. Perhaps there are no problems and your accounts may show break-even or even some profit and you decide you want to expand by investing in a second territory or another outlet.

So because you don’t have any spare cash, you decide to approach your bank.

Our experience, particularly in the current economic environment, is that banks will require you to put in some further new money at that time, being often unwilling to solely rely upon what you put in as your contribution at the outset.

So once again it would have been better to have borrowed at the beginning and kept some of your own money back to assist your expansion plans when you - and not the bank - felt the time is right.

Chris Roberts is a director of Franchise Finance and a British Franchise Association Qualified Franchise Professional. Franchise Finance arranges finance for franchises, prepares business plans and runs business and financial training courses and workshops through its Business Training Academy. The company is an affiliate member of the British Franchise Association and has a 95 per cent success rate in raising finance for clients.

For more information call 01844 355575, email [email protected] or visit www.franchisefinance.co.uk.