Finance packages for franchises

There are a range of financial products available to help you get on the franchising ladder, says Cathryn Hayes, HSBC’s head of franchising

An important aspect of becoming a franchisee is how you finance your venture. The majority of prospective franchisees won’t have the necessary finances required to start up a franchise, so will need support from a bank.

Understanding the basic types of financing may help you decide which options are best suited to your business and circumstances, while also helping you to save money, improve cash flow and add flexibility to your business.

Backing
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HSBC recently supported Nadim Iftikar Choudary in securing funding to bring his total portfolio of Midlands and north west-based Pizza Hut Delivery outlets to 14. Nadim says: “HSBC has been very supportive of the business and has given us their required backing; we see this very much as a relationship.”

Hina Patel turned to HSBC to help her realise her dream of owning a Bluebird Care franchise. She needed £45,000 to launch her business and also got backing from the government’s Enterprise Finance Guarantee scheme, which helps those looking to invest in a business who may not have the necessary security. Steve Moggs, HSBC local business manager, says: “Hina took the correct approach when seeking funding. She did her research and pulled together an impressive business plan. That helped her successfully secure the funds.”

The provision of finance can be in several different forms and usually you can agree a package to suit your needs. Loan accounts are most often used for the purchase of assets; for instance, a property purchase where the loan will run for a longer period or a vehicle purchase where the term of the loan will be shorter to reflect the rapid depreciation of the asset. Fixed interest rates are often available. Here is an overview of some of the options that may help you.

Overdraft
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An overdraft is a borrowing facility linked to a bank current account. Overdrafts are designed to help manage short-term borrowing needs when you need to pay money out (for example, to purchase raw materials) before receiving money in from sales.

An overdraft is repayable on demand, which means that in principle the bank could demand repayment in full at any time. Although, in practice, if there has been no significant deterioration in a customer’s credit status or any breach of other existing facilities a customer may have, immediate repayment is unlikely to be requested. Overdrafts are usually agreed for six to 12 months, after which they may be renewed by negotiation.

An overdraft is a working capital facility and could be an excellent way to cover:

* Short-term cash flow fluctuations.

* Particularly heavy spending that can be repaid quickly.

* Unforeseen events.

Overdrafts are:
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* Flexible - they offer instant access and can be used only when they’re needed.

* Cost effective - interest is only paid on the amount borrowed and is usually agreed at a margin above the Bank of England base rate, which can vary. The margin is based on risk factors and is generally cheaper than borrowing by credit card. How you run your bank account can affect the interest rate you pay on your overdraft.

* Easy to arrange - following receipt of all necessary information, we will do all we can to provide a decision on small business borrowing within two working days. For larger businesses, it would be within 10 working days.

If a business relies heavily on its overdraft and finds it difficult to bring its account into credit, it should ask whether it is borrowing money in the best and most cost-effective way. If your business finds itself in this position, please talk to us as we may be able to offer you alternative ways of borrowing.

Interest and fees
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When we set an interest rate, we take into account a number of factors, including your stake in the business, security deposited and our evaluation of the risk involved. There are some special finance schemes for some of the larger, well established franchisors. We may also charge a fee to cover the costs of setting up new borrowing and completing the security arrangements.

Business loan
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A business loan is an amount of money borrowed for an agreed period of time with an agreed repayment schedule. The repayment amount will depend on the size and period of the loan and the applicable rate of interest.

Loans are:
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* More suitable than overdrafts for longer-term finance needs.

* Cost effective - interest can be fixed (eg, interest is generally fixed for smaller loans up to £25,000) or may be set at a margin above the base rate, which can vary. The margin is based on risk factors and is generally cheaper than borrowing by way of overdraft.

Business loans are typically simple to arrange. Following receipt of all necessary information, we will do all we can to provide a decision on small business borrowing within two working days. For larger businesses, we will do all we can to provide a decision within 10 working days. Should further information be required, a second period of 10 working days will begin from its receipt.

Business credit card
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Business credit cards operate in a similar way to personal credit cards and are a way to pay for day to day expenditure. Business credit cards offer:

* Help with cash flow - there’s an interest free credit period on purchases.

* Flexibility - repay in full or make a payment and carry the balance over to the following month.

* Cost control - card transactions can be viewed online and employees can be issued with cards.

Commercial property loans
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Commercial property lending is usually secured by a commercial mortgage, which operates in a similar way to a personal mortgage. This type of lending is typically used for purchasing commercial property, including shops, factories, offices and warehouses. Once you know the right finance for you, prepare your application carefully - you could improve the likelihood of getting the borrowing you want with an application that’s well thought through.

As a potential franchisee, you are in a better position than a self-employed person starting up a business from scratch. You have the backing of a proven business format and details of how similar franchisees operate to show the bank.

HSBC Bank is a leading supporter of the franchise sector and has had a specialist franchise unit for over 25 years. Our commitment to franchising is highlighted by our long-term sponsorship of the British Franchise Association’s Franchisor and Franchisee of the Year awards.