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Funding your franchise

Andrew Cutler, Sales and Franchise Director at Card Connection, explains how to fund and manage the cash flow of your dream franchise.

You may have found the perfect franchise. You may love the product, know you can deliver the service and with some training, will be confident you will be able to manage all the everyday aspects of your franchise. However, managing the financial side of any business may be a more daunting prospect, particularly when setting up.

We have found one of the barriers to people buying a franchise is raising the capital to invest in a business. However, it is important to remember, putting up the funds for a franchise is far less risky than for a start-up business venture. This is because franchises are based upon an established and repeatable business model. Your franchisor will provide all the necessary support in terms of training, marketing, purchasing power and even research and development, meaning the risk of failure is further minimised.

The good news is that, despite the continued challenging economic environment, this proven format is still seen as a relatively low risk by financial institutions. Therefore, when it comes to buying a franchise, banks are far more willing to lend money to fund a franchise, than for the purchase of a standard business venture.

Several leading banks including HSBC and Lloyds TSB have dedicated departments created especially for the franchise sector. Their staff are knowledgeable and used to working with prospective franchise owners.

However, before you consider borrowing large sums of money to finance your franchise, you will need to do some careful planning and be clear on start up costs and working capital. It is not advisable to over stretch yourself in the early stages of running a franchise as the learning curve will be steep and there needs to be room for contingency.

Start up costs will include the initial Franchise Fee. However, it is essential to check what other fees will be needed to get the business up and running. Some franchisors charge extra for training and promotional costs for example. You will also need to think about initial outlay for stock, premises, vehicles and any equipment required.

Most franchise owners start earning from day one, but this is not the case with all franchises. With any business you will need working capital while the business gets up and running, so consider the amount required carefully, as some business models will require more than others.

Once these costs are established, discussion with the franchising department at a bank will reveal various different ways to finance your franchise and further research will be needed. The amount that banks are willing to lend can vary up to 70 per cent of the purchase price of the business.

Lending options include a business overdraft, which will allow flexible borrowing but may not provide enough capital to purchase a franchise. Banks can also lend limited amounts of funds through business loans. These are usually on agreed repayment terms over the lifetime of the loan. They can vary from large or small loans, some are short-term loans and others can be repaid over many years. Sometimes initial repayments can be deferred to assist with initial cash flow requirements. Some banks offer payment ‘holidays’ which can help with expansion costs in the future.

If you need to buy property for your franchise, a commercial mortgage may need to be considered. This works rather like a domestic mortgage with certain conditions attached.

Once you are up and running, invoice finance can free up cash from invoices to help with cash flow. Qualifying loans can be backed by a Government guarantee for up to 75 per cent of the loan. It is worth discussing these options in detail with your bank.

Financial discussions with your franchisor may also prove fruitful. If a franchise territory has been ‘on the market’ for a while, the franchisor may be willing to offer assistance to spread out the cost of the business over time, as an incentive. These deals are rarely advertised so it is always worth asking how a franchisor might be able to help. If the franchisor is confident the business is sound and satisfied that you are a good potential franchise owner, they will be happy to work with you to find an innovative way to solve financial issues.