How to... Secure your franchise funding
Having carried out your due diligence and identified the franchise for you, now is the time to get the ball rolling and secure your business funding
According to the latest NatWest/bfa survey, around 60 per cent of franchise owners need funding to set up their business, with the vast majority doing so from a bank.
While you may have the tried and tested business model of a franchise backing your funding application, you still need to ensure you are clear and thorough when approaching the bank.
Where to begin?
Before you are ready to talk to the bank about borrowing money to start your franchise, you need to establish how much funding you will need.
There are a number of costs which should to be taken into account, depending on the type of franchise – the initial Franchise Fee is really only part of the picture. You will need to consider:
Depending on the type of franchise, you will need sufficient cash to fund stock, day-to-day business expenses, initial premises costs such as insurance, rent deposite, utility deposites and, of course, your own drawings until such time as sales inward cash flow turns ‘positive’.
Management Service Fees (MSF)
Once up and running, you will pay the franchisor ongoing MSF – this may be a percentage of your turnover, a mark up on products provided or a fixed monthly or weekly fee.
As the franchise owner, you are responsible for funding the fitting out of the franchise in accordance with the franchisors’ requirements. This may be as simple as the purchase or lease of a van and some tools, or it may involve renting, refurbishing and preparing retail premises with branded fittings. In some cases, you may have a different arrangement with the franchisor – for example, if you’re purchasing what’s known as a ‘turnkey’ operation, a franchisor might acquire and fit out the premises for you and then hand over the franchise once it is ready.
The next step to securing franchise funding is to establish how much money you can invest in the business. Have you got savings? Can your family help? Could you sell your car? Consider what security you can give to back up your loan, do you have a life policy with some value, or have equity in your home?
It is important to know how much cash you can put into the business and you must be realistic when borrowing. Banks will typically lend up to 70 per cent of the set up costs for a proven franchise and 50 per cent for a new concept.
A number of national banks now have Franchise Departments that specifically deal with the financial needs of potential and established franchisors as well as franchise owners.
You should approach one of these banks as there are some clear advantages to you in doing so. They will have a good knowledge of the franchise, how it has performed over the years and in the early days, will look to organise any offer of finance accordingly.
Many franchisors have ongoing relationships with the banks that enables franchise owners approved by the franchisor to be looked at more favourably. Therefore the franchisor may well suggest a particular bank for funding – though there is never a guarantee that you will be lent money. There are many things to consider when starting your own business but one of the key elements to securing franchise funding is presenting the bank with a well-presented and structured business plan.
Your business plan
It is important to remember that the quality of your application for funding will have a great influence on your chances of success. Increasingly, banks are looking to receive a ‘professional’ business plan, SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, financial forecast and CV to back up the application.
It is essential that you provide the right type of information to enable your would-be lender to make an informed decision with ease. Your franchisor will probably help with this, but you need to ensure that you understand the figures and ‘own’ the business plan.
When looking at projections, the bank is expecting the new business to demonstrate that it can meet both its loan repayments and the franchise owner’s salary - the amount that the franchise owner will need to take from the business to meet all their outgoings.
Here are the fundamental rules for writing a business plan:
- Clarify the purpose of your plan before you write it
- Be concise – focus on key information the reader will want
- Highlight future plans as well as describing the current situation
- Be realistic – financial projections must make sense and be achievable
- Include unnecessary detail
- Base your plan on over-optimistic assumptions
- Ignore competitive threats and weaknesses
The next step
Remember, starting your own business is a life changing decision so be sure you fully understand the financial commitment you are entering into before signing on the dotted line.
Make sure you talk to your bank; they can help you to develop a financial package suitable for your specific needs, using all of the options available. They will also be able to offer you advice and guidance to help you develop your business both at the outset and ongoing.
Written by Tiffany Brooking