Size matters when funding a franchise
Colin Chadwick QFP looks at the challenges faced by prospective franchise owners when they are seeking funding for small and large franchises.
If you are looking to raise finance for a franchise, in the majority of cases you should not have too much difficulty, provided you have a sound credit history and a robust business plan. You should approach a bank that has a dedicated franchise department as there are some clear advantages to you in doing so.
The franchise department will have a good knowledge of the franchise, how it has performed over the years, what the business plan should include and how it will perform in the early days and will look to structure any offer of finance accordingly.
Before lending, a business plan will be required and should include details about the franchise, the costs, the sector it operates in, its competition – locally, regionally and nationally – your CV, your assets and liabilities and projected financial information. If you are buying an existing franchise business, information about the actual financial performance will be required – ideally for the last three years.
For established successful franchises, you will be able to raise a greater level of finance for your start-up costs and working capital requirements.
To give you an example, this could be up to 70 per cent of the total finance required. For new franchises the figure will be around 50-60 per cent. This compares well against raising finance for an independent start-up business, which does not have a brand and proven model behind it.
Obviously there has been a period of recession, but throughout this, finance has been made available to people looking to start up a franchise. Business failure in the franchise sector is lower than the start-up market as a whole and that makes it attractive to a bank. The 2012 NatWest/British Franchise Association Survey reported that 91 per cent of franchise owners were trading at a profit.
How much will it cost to set up a franchise?
The answer to the above question depends upon what type of franchise you opt for.
There is a huge amount of variation depending on the sector. For example, the average start-up cost for personal services is about £24,000, whereas for hotels and catering, it is roughly £140,000, according to the NatWest/bfa survey. Included in the cost are items such as the Franchise Fee, equipment, stock and working capital.
When approaching a bank for funding, the cost of the franchise is clearly a consideration. For franchises where the start-up costs are higher, the franchise owner contribution will also be higher as you will need to contribute a minimum of 30 per cent of the total finance required.
Additionally, when a higher funding requirement is required on a viable business proposition, the bank will require a charge over assets as security, which may not be required for funding under £25,000. If there are no assets to offer as security for a conventional loan, the banks will look towards the Enterprise Finance Guarantee (EFG) scheme. Launched by the Government in January 2009, the EFG scheme supports the banks in lending to customers where traditional bank lending would not have been available. It provides the bank with a partial guarantee (75 per cent) from the Government on borrowing.
Starting out in business is a big decision but whatever you decide, provided you do your research, entering the franchise sector should be a rewarding experience. NatWest has the longest established dedicated franchise department of any bank, helping thousands of entrepreneurs set up successfully each year in the sector.
Colin Chadwick QFP is the Director of Franchise Development for Royal Bank of Scotland Group. With over 30 years of experience in banking he is a Qualified Franchise Professional and a regular speaker at franchise exhibitions and seminars.