FRANCHISING IN THE CREDIT CRUNCH

Andy Stavely, Chemex Franchise Recruitment Manager

There is much talk of doom and gloom in the economy and with money tight you might be more wary about going into business for yourself. However, when is a good time? The fact is that businesses are built in recessions too.

In almost 25 years of trading, Chemex has experienced periods of both recession and boom. While the UK is by no means in a full blown recession, consumers are concerned about the current state of the economy.

The credit crunch means that lenders will be more careful about providing money for business start-ups outside of franchising. For established and credible franchisors, funds are still readily available through the main banks who will typically lend up to 70 per cent of the franchise investment.

Additionally, essential services such as cleaning and hygiene products where health and hygiene related issues create the demand, are not tied into consumer spending. Due to the nature of the products and their continuous demand this is also a repeat order business. Although not recession-proof, the extensive and diverse range of Chemex products provide choices for the customer who will always need cleaning and hygiene materials whatever the state of the economy.

It is generally accepted that the failure rate for franchises is lower than that of stand alone business start-ups. However, it is important to choose your franchisor wisely and find something that you will enjoy doing which has the potential to realise your dreams and aspirations. Get rich quick schemes are seldom stable and for the long term. Promises of fast cash and immediate returns should ring alarm bells. Traditional businesses require hard work, planned growth and business acumen.

Chemex provides a detailed introduction to our business for any potential franchisee which includes a meeting at our head office in the West Midlands, discussions with franchisees over the telephone and time spent in the field with a franchise operator. Our selection programme is designed to find the right candidate match, as the next 25 years' growth will see many of our franchisees moving towards the management of multi- van operations.

As a guide, typically banks will lend up to 70 per cent of the total franchise set-up costs, including any working capital requirement.

How to get money from your bank

Banks view loan applications for franchise investments favourably, especially banks with specialist Franchise Departments. Lloyds TSB provides its view of franchising and explains how to maximise your chances of getting your hands on that all-important capital

Running a franchise is no mean feat. As with any business, you will be expected to invest your own capital, so it is important that you get all the necessary advice to help you make the right decision. A well-established franchise system will offer an investor a tried and tested business model with initial training, ongoing support, brand recognition and the collective buying power benefits that a network of businesses can bring. But you will still need the support and advice of a bank.

Banks with a specialist franchise department, such as Lloyds TSB, are a good place to start. These banks regard franchising as a less risky way of setting up in business, this usually means that they will provide preferential terms for franchisees, whereas lenders that don't have franchising expertise tend to treat prospective franchisees as they would any other business.

When you first contact your bank, it's best to go straight to the Franchise Unit rather than approaching your local business bank manager directly. The franchisor you are dealing with maybe able to put you in touch.

SELECTING'YOUR'FRANCHISE INVESTMENT
It's worth noting that franchising will not suit everyone. When considering whether franchising is the right option for you, one of the first decisions you need to make is what type of business you have an aptitude for - and what you would enjoy. Running your own business takes a lot of hard work, possibly long hours and a great deal of self-motivation, drive and commitment. An investment in a franchise reduces the risks of going into business, however it doesn't eliminate them.

A good starting point, when you're looking for an investment opportunity is to consider franchises that are members of the British Franchise Association. They will have passed an assessment process and will have received an official accreditation. That's not to say that other franchise opportunities should be ignored, but never lose sight of the fact that the level of financial help you get from a bank will reflect the strength of the franchise you are investing in.

SELL'YOURSELF TO'THE'LENDER
The foundation stone of any financial assessment by a bank is the business plan. It's this document that sets out your proposal to the bank, but even the best plan can fail if it isn't presented in the right way. If the franchise opportunity you are considering requires an enthusiastic individual with strong communication skills and the ability to sell, the bank manager will be looking for you to demonstrate these attributes when you come to talk through your plan.

Meeting the bank manager need not be a daunting prospect provided you are well prepared and understand your business plan. It is important to present your proposal confidently and to be able to answer any question the bank manager may have about the business. It is advisable to provide the bank with a copy of the business plan in advance of the meeting so that the bank manager is well prepared with relevant questions about the business when you meet.

HOW'MUCH'CAN'YOU'BORROW?
The level of finance available from a bank will depend upon the strength of the franchise system and your business plan. As a guide, typically banks will lend up to 70 per cent of the total franchise set-up costs, including any working capital requirement. An investor must have a cash stake in the business and usually the bank will require security to cover the agreed lending. This will typically be a legal charge over a residential property, although other forms of security will be considered such as personal guarantees, commercial property and life policies with a surrender value.

Small Firms Loan Guarantee maybe an option if adequate security is not available. The scheme is a joint venture between the Department for Business, Enterprise and Regulatory Reform and a number of participating lenders. Its purpose is to provide finance where a lack of sufficient collateral is available for an otherwise viable business proposition. The DBERR will guarantee the loan under the scheme for 75 per cent of the outstanding amount. The borrower pays a premium to the DBERR and interest rates are usually higher than a fully secured loan.

Other finance options maybe available from lenders such as asset finance for the purchase of equipment or vehicles, factoring for debtor book finance and corporate cards to support cashflow management. Speak to your bank manager about the most suitable financial structure for your business.

SUCCEED'WITH THE'RIGHT'LENDING'PARTNER
The ongoing relationship with your bank manager is important and you need to understand and agree the extent of support available to you particularly in your first year of trading. Some banks provide ongoing telephone call centre support while others offer an experienced local bank manager who you can meet on a regular basis to review the development of the business. Selecting the right bank is an important decision for the ultimate success of your business.

LLOYDS TSB'S TOP TIPS FOR BORROWING FRANCHISE INVESTMENT CAPITAL

1. Select a bank with franchising expertise
A list of British Franchise Association affiliated banks is available at www.thebfa.org

2. Shop around for the bank that best meets your own requirements
Your existing bankers may not necessarily be the most suitable business bank for you.

3. Contact the bank's Franchise Unit
Arrange an introduction to a franchise-experienced business manager based locally to you. Don't approach your local business centre yourself.

4. Decide what you need from your bank and make sure it can deliver
For example, can your business manager visit you at your premises?

5. Financial considerations are important but don't decide on price alone
Select a bank that can provide the professionalism and ongoing support you are looking for.

6. Make use of the bank's own business planning templates
Your chosen bank will require a copy of your business plan, financial projections and a breakdown of your personal assets and liabilities to consider requests for finance.

7. Ensure that you are well prepared for the bank manager meeting
You will need to demonstrate that you have a good understanding of the business opportunity and your financial requirements.

8. Don't start up business being under capitalised, but only borrow what you need
Seek professional advice from an experienced accountant. You must be prepared to invest your own capital otherwise you can't expect a lender to do so.

9. Keep the lender informed of issues within the business which may impact on the agreed finance
Any property given as security may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it.

10. Have a reserve of funds
You may need to fall back on them in case the business takes longer than anticipated to get established.

Richard Holden reports