10 Golden Rules of Franchise Finance

Raising the required funds to finance your franchise does not need to be a daunting process if you follow a few golden rules

Next to marriage and buying a home, setting up a business is one of the most important decisions you are ever likely to make and investing in a franchise is no less important - in fact it is a business marriage. It is essential that you thoroughly research your chosen franchise and territory before making a commitment to invest. Of course, trading performance of any business is also directly linked to the commitment of the business owner. Not everyone is cut out to run a franchise, so think things through carefully, get professional advice and when you explore your options, don't leave any stone unturned.

Attend a bfa seminar and purchase their comprehensive franchisee guide which will assist with your research into whether franchising is the right option for you. The bfa runs seminars throughout the year across the UK which consist of a series of presentations delivered by speakers with practical experience of franchising. Full of relevant case studies, it will highlight best practice and help you to identify the potential problems and pitfalls of franchising.

Don't be pressured into making a commitment before you are ready to do so. If a franchisor tells you that you will miss the opportunity unless you sign today then walk away. Ensure that you have the full support of your family and discuss what would happen if things didn't go according to plan. Evaluate your own strengths and weaknesses and ensure that the franchise is something you will enjoy doing day in day out. Remember you are making a long term commitment as it may take several years before you achieve a return on your investment.

Ask questions and don't take things at face value. Lloyds TSB has produced a valuable guide to help you with the type of questions you should be asking the franchisor so you can make an informed decision. Speak to several existing franchisees about their experiences before making a commitment to invest. The franchisor will often tell you that the terms of the franchise agreement are not negotiable however it is essential that you get the document independently checked and explained to you by an experienced solicitor who is affiliated to the bfa before signing on the dotted line.

Before approaching finance providers you need to prepare a business plan. The franchisor may provide some assistance with the plan and banks can provide a template to assist you. The importance of a good business plan can not be overstated. The initial objective of the document is to help you raise finance for the business however it will also help you understand what you wish to achieve from the business and is an essential document to review the performance against your projections alerting you to anything that is not going according to plan. Presentation of the plan is important to create maximum positive impact and you should practice delivery of your plan before speaking to a lender so that you come across professionally.

Well established franchises generally have much higher success rates than stand alone start-ups therefore banks are willing to consider lending a higher proportion of the total set up costs. Typically franchise specialist banks will lend up to 70 per cent of the investment, subject to status and a review of your business plan. For less established franchise opportunities the financial support from a bank maybe at a reduced level. Banks that do not have any franchising expertise will treat your business as they would any other ignoring the many benefits and attractions of operating as a franchisee and preferential financial terms will not be offered to you.

Don't over-stretch yourself financially. Have a contingency reserve fund in case the business takes longer than anticipated to get off the ground. Consider a capital repayment holiday at the start of the loan if it is going to take time to build your client base. A fixed rate loan option will guard against future interest rate rises. Speak to your bank about cashflow management options such as overdrafts, factoring or corporate cards. Consider asset finance for purchases of equipment and vehicles which may free up your credit line with the bank should you need to raise additional finance at a later date. An experienced bank manager can help you structure your finance appropriately.

Banks will generally require security to cover the finance provided, although this will be determined in the bank's assessment of the business plan provided. The most common form of security would be to provide the bank with a legal charge over a residential property with sufficient equity, whether it is your main residence or an investment property. There are finance options available if you do not have adequate security and you should discuss these with your bank manager.

Work out your personal expenditure requirements including mortgage, utility bills, loans, credit cards, food, vehicle running costs and all other living costs to establish whether you will realistically be able to draw funds from the business to meet your commitments. There is a danger of being over-optimistic with your business projections so it would be prudent to get your accountant to review them beforehand to ensure that the forecasts are realistic and achievable.

All too often business planning is given a great deal of attention when businesses are looking for finance at the initial stages and then not looked at again. The business plan should be treated as a working document and never allowed to gather dust. Naturally, as the business develops your business plan should be updated. Should you need to approach the bank for further finance at a later date, then an updated business plan will help demonstrate that you have your finger on the financial pulse of your business.

If you overburden yourself with debt, you will restrict your chances of success however on the other hand you must ensure that the business is not under-capitalised. If you are uneasy about the financial commitment you are undertaking then leave your savings intact and wait for a more suitable opportunity. Banks with specialist franchise departments such as Lloyds TSB will be able to give impartial advice to support your research.

Reported by: Lloyds TSB Head of Franchising Richard Holden