Will a franchisor help me find finance for my franchise?

One of the biggest concerns when buying a franchise is how you will finance it. While franchises offer a structured route into business ownership, the initial investment can be significant. But can a franchisor help you secure finance, and what should you expect from them in this process?

Here, UK experts in franchising provide some clarity…

Are franchisors obliged to provide franchise finance?

Vicky Wilkes, head of legal at Aston Villa Football Club, explains the limits of franchisor involvement. “There is no obligation on a franchisor to help a franchisee find finance to help it start operating a franchise business. However, clearly it may be beneficial to the franchisor to do so.”

Some franchisors may go further, helping candidates by building relationships with banks, Wilkes notes. “To do this, the franchisor will give full details of how the franchise operates. This is alongside details of the capital that will typically be required to set up the business and ongoing running costs. The franchisor will also keep the bank updated with how the business is performing.”

However, Wilkes cautions that “not all franchisors will do this. [You] may have to find [your] own source of financing.”

How do banks support franchisees?

Brian Duckett, former chairman of The Franchising Centre, highlights that many banks have specialist franchise units. “All well-structured franchises have close relationships with the major banks that have specialist franchise sections, notably RBS, NatWest, Lloyds and HSBC.

“Historically, these banks have been very supportive of franchising. They often offer better terms than they would to an independent start-up because they perceive franchisees to be far safer lending propositions.”

He explains how the process typically works: “When the franchise is originally structured and developed, either the franchisor or his or her consultants will contact the franchise section of the major banks. This is in order to introduce and explain the opportunity.

“The franchise section then keeps in contact with the franchisor to keep track of progress. It can then advise the lending departments on the bank’s experience and opinion of the franchise. It’s then the lending manager’s job to assess the individual.”

John Pratt, senior partner at Hamilton Pratt, notes that banks only support good business proposals. “Certainly in the early stages, some franchisors without any or without a good track record may find it difficult to facilitate bank funding.”

Beware alternative franchise finance schemes

Duckett emphasises caution with alternative financing: “Some franchisors will offer alternative forms of finance for their franchisees, in many cases taking a commission from the provider […] Some will also offer to provide the finance themselves, or let you pay in instalments.

“However, this is rarely satisfactory as it clouds the relationship and can indicate desperation to get you signed up.”

“Alternatively, a franchisor might offer a deferred payment mechanism, where it allows a franchisee to pay any fees, particularly initial fees, when the franchise becomes profitable,” explains Vicky Wilkes.

Again, some would say that such an offer suggests the franchisor is desperate to sign up a franchisee, so be sure to question any offer like this.

Alarm bells

Pratt notes that “Whilst ultimately it is always a prospective franchisee’s responsibility to obtain adequate finance, if you do not receive assistance from the franchisor in this area, then this should sound some warning bells.

“Alternatively, if the franchisor is only able to point you in the direction of expensive loan providers, that should also put you off.

“No good franchisor with an established track record will find it difficult to facilitate finance for its franchisees. Therefore, if this doesn’t happen, you seriously need to contemplate walking away.”

Practical takeaways

● Franchisors may help by introducing you to banks or providing information on costs and business performance. However, they’re not legally obliged to do so.

● Well-structured franchises usually have close relationships with specialist bank units. These can make obtaining a loan easier.

● Be cautious of deferred payment schemes or franchisor loans, as these can complicate your financial independence and indicate potential risk.

In short, while franchisors can provide guidance and sometimes introductions, the responsibility for securing finance ultimately lies with you, the prospective franchisee.

Ensuring the franchisor has a strong track record, and understanding all available financing options, is crucial before committing to any franchise opportunity.