Need to secure bank funding to buy a franchise? Andy Brattesani, HSBC’s UK head of franchising, has some top tips
There’s a growing need to ensure viable franchise businesses are able to obtain the finance they need to support the economic recovery. Franchising can be a safer option than going into business on your own. As most franchises are designed for people with little or no experience in a specific industry, starting a franchise allows you to learn something new.
Not doing it alone
A franchisee should have a tried and tested format to follow, training and support from their franchisor and a network of fellow franchisees to speak to - so although you own and operate your own business, you are not doing it alone. A good franchisor will encourage and help franchisees with business planning, both at the outset and on an ongoing basis, helping the business to get off to a flying start and continue to develop. Many small business owners are too busy to keep on top of what’s happening in the marketplace, what competitors are up to and how customers’ needs might be changing, but a franchisor should be looking at research and development and helping its network of franchisees to keep ahead of the game. All this support means banks are much happier to lend to a start-up franchisee. However, before you’re ready to talk to a bank about borrowing money to start your franchise, you need to establish how much funding you will require. There are a number of costs that need to be taken into account, depending on the type of franchise, as the initial franchise fee is only part of the picture:
- An owner/operator franchisee may need to purchase or lease a liveried van.
- You may need to fund opening stock.
- A retail franchise will incur the cost of leasing premises and any refurbishment requirements, as well as shopfront, branding, fixtures and fittings.
- If employing staff, you may have recruitment costs and need to provide uniforms.
- There will be marketing costs involved with an official launch of the business.
- Working capital will be required - what you need to live on prior to the business generating cash flow and profits.
- If training costs are not included in the initial franchise fee, they will have to be factored in.
- You may also need to think about professional charges related to any property transaction, such as lawyer, architect and surveyor’s fees, as well as insurance.
Once up and running, you will pay the franchisor ongoing management services fees - this may be a percentage of your turnover, a mark-up on products provided or a fixed fee.
You should do your homework and fully research what you’ll be getting for your money, both at the outset and once your business is trading.
For an established franchise, most of the major banks will lend up to 70 per cent of the start-up costs. For new franchises, the figure will probably be 50 per cent. You will usually pay the borrowed money back over a five-year period, depending on the length of your franchise agreement.
The first step is to establish how much money you can put into the business - what you can afford to invest. Have you got savings? Can your family help? Prepare a full list of your personal expenditure, including mortgage, hire purchase, household bills and so on. This will show how much money you’ll need to take out of the business in order to live. Start preparing your business plan - a vital document to obtain finance from the bank. As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure you understand the figures, what they are based on and how much you will have to turnover in order to break even. It’s important to consider the financial implications carefully before buying a franchise. You’re entering into a long-term commitment and need to get the finance right at the outset. Now we know our financial and legal options, and we understand the importance of our franchise’s manual, we’re ready to sign with a franchise. The next step in our series covers this very important stage of your franchising journey.