Financing Your Franchise

With an average of £45,000 borrowed by individuals when investing in a franchise, the banking sector plays an important role in becoming a franchisee. British Franchise Association Communications Manager Johanna Roughley talks with Cash Generator Franchise Development Director Robin Page about how franchisees should use the banks to finance their franchise

One of the biggest hurdles prospective franchisees face when deciding to start and run their own business is where they will find the money to do it. With the average initial cost of starting a franchise set at £42,200 (by the BFA NatWest 2005 UK Franchise Survey), it is not surprising that two out of five franchisees need to borrow money for their new business.

'Financing a new business can be a very daunting task for someone who has been an employee all their working life and, therefore, had no dealings with issues related to financing and business planning,' points out Cash Generator Franchise Development Director Robin Page. 'We try to make the whole new store opening process, including financing, as painless as possible.'

According to the recently published 2005 NatWest/BFA Franchise Survey, the most common source of finance for new franchisees is retail banks, followed by building societies, relatives or friends and the franchisor. Before handing over your money to the franchisor you need to ask yourself some important financial questions: How much money do you need to invest? Where will you get that money from? What security do you have? How much do you need to live? What will the business be able to pay back?

For an established franchise, most of the major banks will lend up to 70 per cent of the start-up costs, however if the franchise is relatively new they might drop that figure to between 50 and 60 per cent. Banks usually only lend for the term of the franchise agreement. The reason banks are willing to lend as much as 70 per cent of initial costs is the success rate of franchised businesses. The UK Franchise Survey showed 88 per cent of all franchisees claimed profitability in the past year, which is a far more positive figure compared with success rates of stand-alone businesses.

'The majority of the main UK banks have a dedicated team specialising in providing guidance and finance to the franchise sector,' reflects Robin. 'The banks provide this dedicated resource in view of the higher success rates a franchise has compared to other independent businesses. Banks will lend up to 70 per cent of the total start-up costs for established and well proven franchises such as Cash Generator.'

Many franchisees find their share of the money from savings, investments, life policies or by re-mortgaging their house. There are other sources of funding for franchisees, some of which suit particular franchise systems, and this is where your bank or franchisor will be able to help. For instance, you may be able to lease certain items of equipment or vehicles, or if you need to pay staff or suppliers before you get paid you may want to look at factoring.

Security is always a factor to consider when approaching a bank for finance. If no security is available banks can consider finance under the DTI's Small Firms Loan Guarantee Scheme, if your business is eligible. This is a government-backed scheme to guarantee up to 70 per cent of borrowing where security is not available and where that lack of security is the only bar to a bank lending the required money.

Many franchisors will help prospective franchisees prepare for their visit to the bank - some even attend the interview with the franchisee - however the bank will expect the franchisee to understand the plan's statements and figures and be committed to achieving these projections. 'When I am dealing with a potential franchisee I discuss in detail what the banks' requirements will be - things like the reputation of the franchisor and how much research you have done on their company and product,' says Robin. 'They will mainly want details about you, as it is the individual and not the specific franchise that is assessed. This is because success will be determined by the amount of commitment and enthusiasm of the new franchisee and their previous history.

'Before a bank is willing to lend, a business plan will be required and should include details about the franchise, the costs, the sector it operates in, its local and national competition, your CV, your assets and liabilities, and projected financial information. Any bank's Business Start-Up Guide can assist in drawing up your plan. If you are buying an existing franchise business the bank will want to see the actual financial performance and the last three years' accounts would be helpful.'

Many banks will offer a period of free banking, but it is important to research interest rates with different banks, and look at the services each bank's franchise unit offers to ensure you are getting the best deal. The BFA has five Affiliated banks that all have dedicated franchise teams: Bank of Scotland, HSBC, Lloyds TSB, NatWest and The Royal Bank of Scotland.