A planned, structured approach is the key to successfully financing a franchise, says Derrick Simpson, managing director of Franchise Resales
There has been much recent comment in the press about the difficulty of obtaining funding for business. This may have put off potential franchisees considering the purchase of a franchise resale.
Often the purchase of an existing business - a franchise resale - can cost more in initial funds than setting up a new franchise. This can lead to prospective purchasers thinking they may not be able to obtain the necessary financial support for their purchase. But this is not always the case.
While there are various avenues open to obtain funds, the usual route is to opt for a loan from one of the main banks that specialise in and actively support franchising. It is here, however, that plans for owning a business can come to a halt due to poor preparation. The key to successful funding is a planned, structured approach. Those who attend the national franchise exhibitions will have had the opportunity to participate in the franchise finance business planning clinic, which provides an insight into the realms of business plans and the secrets of success.
When approaching a bank, there are some points to bear in mind if you wish to be successful in your application. Firstly, don’t leave it too late to make an approach. An initial enquiry will register you on the bank’s radar and will provide some basic information about the process involved and its individual requirements.
Secondly, don’t just pop into your local branch of the major high street banks. As with much in the franchise sector, you will require specialist advice from a franchise specialist, so in each case make contact with the franchise units of the various banks. The best place to find out their contact details is via the British Franchise Association website (www.thebfa.org). The main banks involved in funding for franchises are Lloyds Banking Group, HSBC and RBS/NatWest, though new lenders, such as Metro Bank, are starting to enter the franchise marketplace.
The next point to consider is that any borrowing will require some form of security. This may be provided by a bank taking a charge over your house or other property or, if you do not have any available equity in your property or do not own a property, via the government’s Enterprise Finance Guarantee Scheme.
The EFG was put in place a couple of years go to provide funding for enterprises where there was not adequate security available to establish a business. The scheme can be used for both new start-ups and franchise resales and can even be utilised for top-up business loans.
While the EFG scheme sounds like manna from heaven, the basic requirement before being able to secure funding via it is to have your entire business plan and projections approved by one of the above banks. If they would have provided funding had security been available, they will put your application forward for approval under the EFG scheme.
The core element of any funding proposal is the business plan. This is not just a cash flow projection, but a comprehensive summary of the whole business.
A successful business plan will include a cash flow and profit forecast for the business and will probably cover at least three years’ trading. These must be backed by solid logic, so there is no point taking a business generating a small profit and expecting a bank to accept the business will, for example, double in size within the first year without some concrete evidence of how this will be done.
The business plan must also cover the marketing and sales activity that will be carried out and how you see the current shortcomings of the business being overcome by your activity. A SWOT analysis (an evaluation of strengths, weaknesses, opportunities and threats) is the best way to tackle this.
Finally, your personal CV and skill set must be included, as well as a detailed statement of your personal finances - a personal profit and loss account. All of these elements together comprise your business plan and funding application. They will of course also form the base upon which to monitor the growth of your future business.
With this structured approach, a well prepared franchise resale such as those advertised on the Franchise Resales website (www.franchiseresales. co.uk) can usually obtain funding and the benefits of the purchase of an existing franchise can be yours.