What should I consider when it comes to funding my franchise?

James Thomas writes:

To gain funding for the purchase of a franchise, you will need 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.

Finance can come in various forms - from funding from a high street bank and directors’ start-up loans to asset finance for specific items of equipment or vehicles.

It makes a significant difference to the amount you can borrow if you are a ‘secured’ borrower (able to borrow against a property) compared with if you are an ‘unsecured’ borrower such as a tenant.

However, for those who do have equity in their property to borrow against, it is often not as much as potential franchisees think. This is because all banks write back the property to 70 per cent of its valuation, then subtract the remaining mortgage amount to give the equity value. 

This means finance often needs to come from several different sources. Here, the choice of broker is important. You will need a broker that understands all aspects of your business plan, company structure and wider personal circumstances, so they can help deliver the required levels of funding needed for your project.

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! 

We have seen instances where franchisees have started businesses having not secured all the requisite funds, then been forced to take unfavourable loan agreements to cover the costs of escalating start-up costs. This puts your business on the back foot from day one and significantly increases the risk of failure.

To secure the appropriate funding, it is advisable to work with an independent supplier who is not limited in their approach and one who can fully assess your franchise proposition and the market to get you the funding deal you need.

An independent supplier is not beholden to any one lender and will support you and your business in the most appropriate solution to ensure the success of your franchise.

James Thomas is commercial manager at business advisory and chartered accountancy firm d&t. As well as accountancy services and a fully independent funding service, connecting franchisees to much needed finance to start or grow their business, d&t offers business planning services.