How can I fund my franchise investment?

Buying into a new franchise opportunity is exciting, but most people need a clear plan to finance the investment.

From your own capital to grants, bank loans and government schemes, there are several ways to fund your franchise. We’ve broken down the key considerations using expert advice…

Should I use my own money to finance my franchise?

Using your own money to fund a franchise is the simplest approach. This gives you full control over your investment from the start.

Brian Duckett, former chairman of The Franchising Centre, says, “If you have the funds, [one] option is simply to put all your own money into the venture and finance it entirely yourself. Alternatively, get an investment partner, maybe a friend or relation, who will also introduce some funding.”

What options do I have if I don’t have enough cash?

If you don’t have enough capital to fund the franchise entirely yourself, Louise Harris, principal at Franchise Projects, recommends working closely with your franchisor, who can often introduce you to lenders familiar with their franchise.

“A good franchisor will have relationships in place with lenders who have reviewed the franchise opportunity – based on figures provided by the franchisor. Grants are available for some sectors: research these, too. Again, your franchisor should be able to guide you,” she says.

Harris also stresses the importance of investing your own money. “Using your own money is important. It is rare for a purchase to take place without some ‘skin in the game’ from a franchisee.

“You can expect this investment to be around 30 to 50 per cent of the overall requirement, depending on the business. Make sure you’ve factored in repayments – not just affordability, but cash flow implications.”

How much funding can I realistically get from a bank?

John Pratt, senior partner at Hamilton Pratt, cautions that lending varies widely. “There isn’t a typical formula. Each franchisor and franchisee is different. Most clearing banks have a specialist franchise unit.”

He adds that banks prefer to lend to established franchises with a track record. “For those franchisors that have made use of recognised advisers, are registered with the British Franchise Association and have a good track record of successful franchisees, funds will be available. For those who haven’t, the banks may be unlikely to make loans available.”

Pratt explains that lending ratios have changed over time. When it comes to banks, “the general rule of thumb is that they will match pound for pound every pound provided by a franchisee. For highly rated and successful franchises, banks may be prepared to lend on a ratio of 1:2.

“Historically, these ratios were 1:3 for particularly successful franchisors, but these days are sadly gone.”

Are banks more likely to lend to a franchise than a start-up business?

“A new, relatively unproven franchise that has not been developed with the help of British Franchise Association-affiliated consultants and lawyers will get no better terms from a bank than will an independent start-up,” explains Brian Duckett.

However, “franchisees of a well-structured, relatively proven franchise that is also a member of the BFA are often welcomed by the banks because they represent a much safer lending proposition,” he continues.

What should I do before approaching a bank?

Brian Duckett recommends preparation. “The first tip is not to approach the bank until you have discussed with the franchisor its process for doing so. All reputable franchises will be known to the various banks’ franchise sections and other sources of funding.”

He also advises understanding the numbers in your funding plan. “The important thing is that any figures given to you by the franchisor should be based on fact, ie the results of either company-owned or existing franchised outlets.”

For larger investments, you may face detailed questioning from a business manager at the bank. “They will want you to demonstrate your understanding of how the business is likely to grow and what the key performance indicators will be. Be ready for some awkward questions.”

What if I don’t have property to offer as security?

If you’re proposing to join a well-established franchisor whose franchisees have a good track record of paying back loans from the major banks, you may be able to make use of the Enterprise Finance Guarantee.

This is a loan guarantee scheme to facilitate lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record.

Duckett explains that other options could include “other assets that you own, such as endowment policies with high surrender values, or having someone else stand as guarantor for your loan, using their own property or other assets as security.”

Duckett also notes the potential to access pensions, following professional advice. “Depending on your age and personal circumstances, it may be possible to release some money from your pension fund, without having to continue to draw a pension from the balance.”

How should I prepare to secure funding?

James Thomas, head of UK franchising at easyStorage, emphasises the importance of a “solid, workable and realistic” business plan. “This will identify how much capital you need to borrow and demonstrate to the lender how you will be able to afford to repay any loans alongside other operational costs.”

He warns that financing often requires multiple sources, and timing matters. “If you use different brokers or suppliers for different elements of the project, it is critical that you do not draw down on any one solution or commit to things like premises leases until all the required funding elements are approved.

“Otherwise, you will be at significant risk and may be tied into financial commitments before actually being able to start trading.”

What about working capital?

Dr Hannah MacKechnie, director at Radfield Home Care Franchising, reminds prospective franchisees to consider cash flow. “It’s important to make sure you have sufficient working capital to enable you to cash flow your business. This is in case it grows more slowly than you expected,” she says.

“You should discuss financing options with your potential franchisor. They may have relationships with certain banks or other lending institutions that could assist you.”

Conclusion

Funding a franchise doesn’t have to be overwhelming. By combining your own investment with carefully chosen loans, grants or government-backed schemes – and preparing a realistic business plan with clear cash-flow projections – you can reduce risk and ensure your franchise starts on a solid footing.

Planning ahead and understanding all your financial options is key to a successful launch.