Top Tips for Financing Your Franchise
Now you have chosen your ideal franchise how are you going to finance it? If you have savings or maybe a redundancy payment to cover your start-up costs you are in a very fortunate position. If not, you will have to seek some source of external finance.
This article looks at how to prepare your case to have the best chance of gaining the funding you need. You may think that it will be difficult to get a bank loan or overdraft in the current economic climate. However, it is fortunate that the banking sector is still very much in favour of solid franchise businesses as they are statistically proven to have a greater chance of success and are therefore seen by the banks as less risky. However, this does not mean that you can take it for granted that your application will be approved – many potential franchisees have failed to secure funds because their approach was ill-prepared.
It is essential that you speak to the right department in your bank. Many of the high street banks have specialist teams with an in-depth knowledge of the franchise sector and it is this department that you need to put your proposal to. The bfa website (www.thebfa.org) has lots of useful information including specific banking contacts and it is crucial that you do this research. There is no guarantee that your current relationship manager is going to know anything about franchising and there have even been instances where good applicants looking at solid franchises have been turned down for funding by the major high street banks simply because the bank managers dealing with the request didn’t understand franchising.
The same point applies to franchisors -- it is the responsibility of the franchisor to ensure that the appropriate banks and franchise departments know about the business, otherwise when a prospective franchisee goes to their bank to apply for funding to buy your franchise, there is a risk that either the bank will say ‘never heard of it’ which doesn’t reflect well on the franchise/franchisor, or else they will be turned down by someone who doesn’t understand franchising. The more established the franchise is, the more likely a bank is to consider the franchisees application – this doesn’t mean the franchise has to be 20 years old, just that the franchise banks should have heard of it and perhaps already have decided on a lending policy specifically for that brand.
Before approaching the bank, you will need to decide how much you need to borrow. In some circumstances the banks can lend around 70% of the start up costs (franchise fee and working capital) so say the total set up cost is £30,000 the bank will fund £21,000 leaving you with £9,000 to fund yourself.
Depending on your creditworthiness you may have to provide additional security to the bank. Be realistic about how much you will need. Very few franchises will produce revenues from day one, so you need to think about your domestic and business outgoings in the first few months and how this will be covered.
You may think business and domestic issues should be kept separate, but they impact each other – if you no longer have a guaranteed salary coming in each month you need to make provision for the household bills and other outgoings until the franchise business starts to generate a steady income stream.
It is also wise to have a contingency fund put aside to cover any unexpected events – a client may not pay you or you may have to take time out of the business to deal with a domestic matter. Many franchisees have found themselves running out of cash because they have been overoptimistic about future earnings and have not been realistic about what could go wrong in future.
The bank will want to see a solid business plan and proof that you have done your homework. Usually, your franchisor can help you with templates for business plans and financial information but at the end of the day it is your business plan. The plan should contain information about the franchise and the market opportunity, background details about yourself and anyone else involved in the business plus basic financials such as sales and cash flow forecasts. If you are not comfortable with financial information you may want to enlist the help of your accountant or financial adviser to review the plan for you. Banks will want proof you have done your due diligence so make sure you have looked at the markets, trends and competitors. Have you checked out the franchisors background and spoken to existing franchisees (something you should do as a matter of course anyway).
You need to know your numbers inside out – test your projections, are they too conservative or over ambitious? Banks see hundreds of business plans each month and instinctively know what are and are not realistic numbers so try to give a genuine forecast without sounding too pessimistic!
Lastly, and I cannot emphasise this enough – don’t start up underfunded --- make sure you have borrowed sufficient working capital in addition to the franchise fee. Business is hard enough; don’t fail simply because you ran out of cash just as your business was starting to succeed.