8 Hot Tips To Fund your Franchise
Richard Holden, Head of Franchising at Lloyds TSB, explains how to prepare to meet your bank manager
- Business Plan
The importance of a well constructed business plan can not be over-stated. A bank will expect a detailed business plan, incorporating cashflow and profit and loss forecasts to support any financial request. It is important that whoever is looking to raise the funds has involvement in producing and fully understanding the business plan.
Presentation of the plan to the bank is also important and two copies should be provided in advance of a meeting with the bank manager. A second copy of the business plan should be provided in case referral needs to be made to a lending official to gain sanction to the proposed lending. The business plan should be provided to the bank in advance of the scheduled meeting so that the business manager has an opportunity to review the plan in advance and ask any relevant questions during the meeting and this should speed up the assessment process. The business plan should be regularly reviewed and compared against actual business performance once the business is up and running.
With any franchised business there must be sufficient profits for the franchisee to achieve a reasonable living and for the franchisor to cover their costs and make a reasonable profit.
The franchisor must be able to give a detailed breakdown of the expected operating costs for the business and also the likely sales based upon actual performance of franchisees operating in comparable locations.
It is important that the prospective franchisee carries out their own research in conjunction with their accountant to establish the likelihood of profitability and when break-even can be reached.
Any profit and loss projection that is produced should be done so on the basis that the figures are realistic, conservative and achievable. By talking to existing franchisees you should be able to establish whether they achieved their initial forecasts or whether their original projections were unrealistic.
Ensuring that robust management accounting systems are in place from the outset of the business is vital to ensure that the business performance can be carefully monitored and early corrective action is taken should it be necessary.
Cashflow or working capital is the funds needed to keep the business going between paying out for raw materials or stock and getting in cash from the people that you sell to.
The amount of cashflow required varies widely according to the type of business. Careful consideration needs to be undertaken from the outset to ensure that sufficient working capital is in place or an adequate overdraft facility is agreed with the bank.
It is much better to accurately project the funds required at the beginning rather than to go back to the bank for further support after just a short period of trading, although this is a common occurrence.
Gearing is the ratio of the funds borrowed to the owner's cash stake in the business. Historically banks have considered lending up to 50 per cent of the start-up costs for a new business, although most banks will consider 70 per cent of the set-up costs for selected franchise systems, which have a successful track record and have been well established in the UK.
Banks will want a financial contribution from their customer into a new business proposal to show their level of commitment to the project.
Also, with a higher level of borrowing there is a smaller margin for error if other factors impact the business. It is therefore advisable to keep the borrowing commitment as low as possible from the outset to give the business the best possible chance of succeeding.
In addition to any cash stake that is injected into the business at the outset, it is likely that a financial provider will require security to cover the lending agreed.
A bank is not going to lend someone a substantial amount of the costs of setting up their business if they are not prepared to put up security to cover that finance, no matter how strong their business plan, profitability, cashflow and gearing may be. Usually security will take the form of a legal charge over a residential property with sufficient equity. Other forms of security could include a life policy, commercial property, debenture and personal guarantees.
Be realistic from the outset, if you have security to either partially or fully cover the amount you are looking to borrow then be prepared to offer it. Banks will provide preferential interest rates for finance that is secured rather than unsecured borrowing or finance through the Government-backed Small Firms Loan Guarantee Scheme.
- Shop around
The amount of finance, terms of lending, required security and business manager support may vary between banks and it is therefore important that you shop around to find the best deal for you. Some banks have a dedicated franchise unit which advises its business managers regarding franchised related issues and some of their managers have a strong working knowledge of franchising.
Ideally, you should speak to banks that can offer specialist franchising support. Speak with at least three banks to ensure consistency of advice and the most competitive package.
Most banks recognise that financing franchised businesses with a proven track record presents a better risk than a new start-up business and consequently competitive packages are available but can vary from bank to bank. Don't just look at the finance but also consider the banking services package and free banking period which also varies from bank to bank. These banking packages do change from time to time so shopping around for this type of deal is important for selecting the overall package which best suits your individual requirements.
There maybe some room for negotiation for the level and structure of the borrowing, security and conditions attached to the lending particularly for very strong business proposals. There is a possibility that banks may be prepared to negotiate the terms of the agreed finance such as interest rates and borrowing fees.
Once you have gained the commitment from a bank, by way of a formal offer or agreement in principle to lend you the funds, they will want to arrange the finance. You are possibly in a position to negotiate a small reduction in the interest rate margin offered or discount on the arrangement fee to be levied.
Your position is particularly strong should you receive two offers of support from different banks to negotiate a better deal. Banks are generally aware of the terms that each offers, although there maybe a degree of scope for negotiation in a highly competitive market. Be careful not to burn your bridges and lose a good deal which has already been sanctioned.
- Build relationships
Once you have secured the required funding to set up your franchised business this is not the end of your relationship with your Business Manager. It is very important to build the relationship through regular communication to ensure that the business manager remains onside and willing to support the development of the business. After all, you may require additional financial assistance for a temporary cashflow problem or to purchase new equipment to increase business and it is much easier to gain the agreement of someone who knows and understands your business and has been regularly updated as to the progress made.
Business Managers can provide so much more than a financial decision and you should be looking to use their experience to suggest ways that you can improve your business and them as sounding boards for your ideas in developing your business. There are many excellent business managers who can add a great deal of value to the relationship and support you in the development of the business. Usually the better business managers are prepared to say 'no' to you when they feel it is appropriate to do so to protect your interests.