HSBC: Investment Advice - How to finance your franchise

Most major banks have specialist franchise teams, including HSBC which has had a franchise unit for over 20 years. HSBC Head of Franchising Cathryn Hayes reflects on what makes the banks so interested in franchising

In broad terms, franchising is a safer option than going into business on your own. A franchisee should have a tried and tested format to follow, training and support from their franchisor, and a network of fellow franchisees to speak to - so although franchisees own and operate their own business, they are not doing it alone. A good franchisor will encourage and help its franchisees with business planning, both at the outset and on an ongoing basis - helping the business to get off to a flying start and continue to develop.

Many small business owners are just too busy to look at what is happening in the marketplace, what competitors are up to and how customers needs might be changing - but a good franchisor will be looking at research and development, helping its network of franchisees to keep ahead of the game. All this support means that banks are going to be much happier to lend to a start-up franchisee. But 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 need to be taken into account, depending on the type of franchise - the initial franchise fee is really only part of the picture. For instance, an owner/operator franchisee may need to purchase or lease a liveried van and they will need to fund opening stock, while a retail franchisee will incur the cost of leasing premises and any refurbishment requirements as well as shop front, branding, fixtures and fittings.

Franchisees also need to think about professional charges related to the property transaction, such as lawyer's, architect's and surveyor's fees, as well as insurance. If employing staff, there may be recruitment costs, for instance the franchisee may need to provide uniforms. There will also be marketing costs involved with an official launch of the business.

Working capital will be required - this is what you will need to live on prior to the business generating cash flow and profits. Find out whether training costs are included in the initial franchise fee, if not, these will have also to be factored in.

Once up and running, you will pay the franchisor ongoing management services fees - these may be a percentage of your turnover, a mark-up on products provided or a fixed monthly or weekly fee. You should do your homework, and fully research what you will be getting for your money both at the outset and once your business is established.

For an established franchise, most of the major banks will lend up to 70 per cent of the start-up costs, for new franchises the figure will probably be around 50 per cent to 60 per cent. You will pay the borrowed money back over a period, maybe three or five years, depending on circumstances. The first step is to establish how much money you can invest in the business. What can you afford? Have you got savings and can your family help? Then prepare a full list of your personal expenditure: mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business in order to live.

Start preparing your business plan - this is a document vital to obtaining finance from the bank. As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure that you understand the figures, what they are based on and how much you will have to turnover in order to break even.

It is important to consider the financial implications carefully before buying a franchise. You are entering into a long term commitment and need to get the finance right at the outset. Don't do it on a shoestring, but don't borrow more than you can afford to repay.


The following outlines a bank's basic approach to assessing a request for finance and should provide a useful insight into the information we would need before agreeing to lend.

  • Person: We look at your background and reliability to establish your track record, financial resources and suitability to run a business.
  • Amount: How much you'd like to borrow, how is it going to be used and how it will benefit the business. How much you are prepared to invest in the business?
  • Repayment: It is not in our interest - or yours - to lend money unless we think that you will repay it. Therefore we will need to understand from the cash flow forecast how you can afford to repay the loan. What assumptions have been made? What level of sales are needed to break-even and is it achievable? Is there a contingency plan for any setbacks?
  • Security: We must assess the risk and decide whether security is required. This will depend on our evaluation of your business as a whole - the prime source of repayment will be cash generated by your business and no amount of security will ever be acceptable if we feel that your business is not viable. The last thing we want to do is realise any security - we would much rather see a successful business continue to trade.

With the full information provided, the majority of lending decisions could be made within 48 hours of the date of the meeting, subject to certain criteria.