How to raise the money you need to become a franchisee

Sukhdeep Dehal, franchise development manager at Lloyds Bank, explains how to go about obtaining the money you need to become a franchisee

For most people, knowing how much finance is available will be a key consideration as to the franchise opportunity that is ultimately chosen. So where is the best place to find out about your funding options?

Banks with a specialist franchise team, such as Lloyds, are a great starting point. For expert support and guidance, contact a bank’s franchise department directly, not your local manager.

Options available

The bank’s franchise experts will be able to give you an indication of the possible finance available and funding options for the franchise brands you’re interested in, even before you’ve made your final decision.

Their history from working with franchisees in the past will give them confidence to be able to lend on more favourable terms for your proposed purchase, as they will have confidence in your ability to replicate the success.

Your chosen bank will ask to see your business plan, including financial projections, to fully consider the assistance you require. Many franchisors encourage and support their franchisees with producing their business plans, while most banks provide business planning templates to assist business owners in writing their plans.

A business plan should be considered as a working document, updated at least on an annual basis when you proceed to launching your business.

In addition to the help the franchisor will provide, it’s important you research your local market. Some business owners neglect this step and, as a result, have little understanding of local demand, competition and the changing needs of their potential customers before they start up.

In today’s digital age, it’s relatively easy for bank managers to research your area and challenge your statements made in the plan about your marketplace. This isn’t done to catch you out, but to ensure you fully understand all the important drivers behind your projections.

Finance requirements

Before you speak to a bank about borrowing money to start your franchise, you’ll need to establish how much fi nance you will require. To get an accurate picture, ask the franchisor for a full breakdown of the costs, including the likely working capital you’ll need.

This element will have variations, depending on your own personal financial position and local differentiators such as rental and labour costs. In addition to this, don’t overlook any VAT that will be payable when setting up the business and factor in if and when it will be reclaimed in your financial projections.

For well established franchise brands, most of the major banks will consider lending up to 70 percent of the total investment, including working capital. However, for newer, less established franchise opportunities the amount a bank will lend is likely to be lower.

The finance term will typically match the length of the initial franchise agreement, so if the franchise licence is five years the maximum term of a bank loan will not exceed five years.

Equally, the other driver behind the maximum term of a loan will be your premise’s lease term, especially if the business is dependent upon the location it trades from. Therefore, ensure the lease matches your franchise term to ensure your borrowing can be spread over a realistically manageable term.

Using your savings

As the bank is unlikely to finance the entire investment, you’ll need to put your savings into the purchase to fund your chosen franchise. This deposit is an important factor to consider when looking at different franchises, as typically you will need to invest between 30-50 percent of the total costs towards the purchase from your savings.

The bank will ask to see evidence of your own investment to establish that the money has been saved over time and not raised through any form of borrowing. More frequently now, we’re seeing people turning to family and friends to help bolster their deposit. While this isn’t necessarily an issue, the funds would need to be gifted without any terms of repayment to be considered as a viable element of the deposit.

Again, it’s important there is some part coming from the applicant’s own savings, even if a proportion is coming in a gifted form.

A bank manager will also want to see a breakdown of your household income and expenditure to identify how much money you need to live on and to establish whether the new business is likely to be able to generate sufficient profits for you to cover your personal commitments.

This is just as important as analysing the business’ affordability, as the household outgoings will need to be serviced even while the business is in its infancy and any pressures could jeopardise your probability of success.

Another factor to consider will be the potential need to provide security. If you’re looking to borrow in excess of £25,000, it’s likely a bank will require you to put up personal assets as security for any loan agreed. This could be in the form of taking a charge against property with sufficient equity.

Enterprise finance guarantee scheme

If you don’t have property available, it doesn’t necessarily exclude you from borrowing more than £25,000. If you have a strong business plan, but don’t have any personal assets to support the lending, a bank may be able to consider financing your plans using the government backed Enterprise Finance Guarantee scheme.

This scheme will usually require a slightly larger deposit, but will allow viable proposals to be supported. Speak to a bank’s franchise department for guidance as to whether you would be eligible for this scheme, as you would need to ensure you have fully invested your available assets into the business before being eligible. This would include all your personal savings and investments, along with any available equity in properties that you own.

It’s essential to thoroughly research the opportunity and fully consider the financial implications before buying a franchise. You’re entering into a long-term commitment and need to get the funding right at the outset.

Don’t try to press ahead with insufficient capital, putting unnecessary pressure on the business from the outset, but don’t borrow more than you can comfortably afford to repay.