The Golden Rules for raising finance

Obtaining the backing of a bank that understands franchising such as Lloyds TSB is not as hard as you may think.

Banks are open for business and they want to lend money to sound propositions. Franchising is a key sector as banks view investing in a tried, tested and proven franchise model as less risky than setting up your own business independently from scratch.

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. Investing in a franchise is no less important – in fact it is a business marriage. Not everyone is cut out to run a franchise, so do your research carefully and seek professional advice.
  • Attend a franchise seminar. The British Franchise Association (bfa) runs exhibitions and seminars that provide an invaluable insight into franchise investment. Lloyds TSB sponsors a series of free evening educational seminars about the benefits and pitfalls of franchising across the UK. For further details visit the website.
  • 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 that day, walk away. 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. Speak to several existing franchise owners 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 the document is 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 guide you. The importance of a good business plan cannot be overstated. It should be treated as a working document and never allowed to gather dust. As the company develops, your business plan should be updated.
  • 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.
  • Don’t over-stretch yourself financially. Have a contingency reserve fund to fall back on 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. An experienced Bank Manager will be able to 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 your 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 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 the forecasts are realistic and achievable.
  • 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 franchising research.

Richard Holden heads up the Lloyds Banking Group Franchise Unit and is an expert speaker at exhibitions and seminars. He also regularly contributes in the national and trade press. The Lloyds Banking Group has trained franchise managers based throughout the UK to offer support to both franchisors and franchise owners.

Written by Richard Holden (pictured)