Financing your franchise through bank funding

If you've got what it takes to be a franchisee, a bank that specialises in franchise funding is your best bet, says Mark Scott

Becoming a franchisee has always been an attractive way to start your own business. For the many people made redundant during the recession, franchising is a great way to become your own boss as it offers the support of a big brand and a tried and tested business model.

Starting your own business could be one of the most important decisions you ever make, so you need to be honest with yourself to ensure you are cut out to be a franchisee.

Simple steps
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To help you do this, consider the following:

* Take a critical look at your strengths and weakness. Are you sure you have the capacity, temperament and skills to run your own business?

* Make sure you have the full support of your family. Do not underestimate the additional responsibilities and demands on your time, which will inevitably cause some strain.

* Ensure you have sufficient capital. You will need at least a third of the start-up costs, and half for a less established franchise.

* Obtain a full list of existing franchisees. Don’t just speak to those suggested by the franchisor, as they may be the only ones who are successful. Visit franchisees in person where possible, and at the very least ask them how their business is performing and what support is provided by the franchisor.

* Examine how well known the franchise and its service/ product are.A good reputation is a head start in business.

* Look at the market as a whole - find out who your competitors will be and how strong their position is.

* Examine costs closely, in particular the franchise fee and monthly management fee, and whether they are reasonable and value for money. Will profit margins be sufficient to support your business after the payment of these regular fees to the franchisor?

* Is the training provided by the franchisor sufficient to enable you to run the business successfully?

* Seek professional advice from an accountant about income and profit projections, and from a solicitor about the legal agreement. Both should have a good understanding of franchising and preferably be affiliated to the British Franchise Association.

Raising finance
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While becoming a franchisee is not without risk, the good news is that if you are looking to raise finance, in the majority of cases you should not have too much difficulty, provided you have a sound credit history and robust business plan.You should approach a bank that has a dedicated franchise department, as there are some clear advantages in doing so:

* A bank’s franchise department will have a good knowledge of your franchise, how it has performed over the years, what the business plan should include and how the franchise will perform in the early days, and will look to structure any offer of finance accordingly.

* For an established franchise,you will be able to raise a greater level of finance to cover start-up costs and working capital requirements - this could be up to 70 per cent of the total funding required. For new franchises, the figure will be around 50 per cent. This compares well against raising finance for an independent start-up company that does not boast a proven brand and business model.

* Any application for finance, and the whole process of getting your business banking relationship established, will be handled by a manager with experience of franchising and knowledge of the franchise you are investing in.

* There may be other related banking products that are offered on special terms to franchisees.