If you're looking to secure funding for a franchise startup, one of the advantages you'll have is that lenders will probably look upon your opportunity as less risky than if you were setting up on your own. This is because your proposition involves operating under a proven business system (providing your application is accepted by a reputable franchisor).
However, it’s likely you will be expected to find at least a third of the startup fund yourself, or possibly as much as half. So it is worth seeking out the advice of lenders before you start the franchising process so you can get an idea of the commitment you’ll be expected to make.
The majority of the big names in banking have dedicated departments dealing with franchise businesses so you won’t be short of options. There are also various ways you can get help with funding, such as fixed-rate loans, variable-rate loans, business credit cards, overdrafts, asset finance and invoice finance. Franchise exhibitions might be a good source of information – you’ll find banks often in attendance, with stands providing information and literature.
It’s worth looking into whether your chosen franchisor has a special relationship with a particular bank or not – if so, that lender might look upon your funding application more favourably. However, there are no guarantees.
Although a franchise is seen as less of a risk than a completely independent startup, any lender will still look closely at your business experience and financial history. If you have a questionable credit history then it might be a good idea to get the advice of an independent financial advisor to assess your options.
A well-prepared business plan is essential, as it will help the lender make a full assessment of your proposal. Any bank will want to check your plan has a net profit built in that will allow you to pay for your personal expenditure, including your mortgage and other bills, as well as take care of any loan commitments. Don’t just look at the amount of funding you need and adjust the turnover figure to suit it, though – your plan has to be credible or the lender will see through it.
There’s no limit to how much a bank might lend you – that will depend on your personal history and the lender’s assessment of your business plan. If you need assistance drawing up your plan, your franchisor might be able to help you or put you in touch with someone else who can, so make the necessary enquiries.
If you are looking for a loan of less than £25,000, it’s unlikely the bank will require security. If you need more than that amount then you might need to secure the funding with assets such as property. The bank will usually offer funds of up to 70% of the value of the property minus what you owe on your mortgage. If you don’t have sufficient equity or other assets to use as security, you might get help in the form of the Enterprise Finance Guarantee – this is a scheme for small enterprises in which the government guarantees 75% of a loan. If you are eligible, the bank will then make a risk assessment based on the remaining 25%.
The term of a loan or asset finance is usually anything from three to ten years. Overdraft facilities are typically reviewed on a yearly basis.
It’s important to remember there are many lenders out there, so shop around.