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The importance of picking the right bank

Choosing which bank to support your plans requires careful consideration, as it could well mean the difference between your ultimate success or failure

It is essential that your chosen bank understands the franchise sector and the business you are investing in. Banks with a Franchise Department are the best place to start your search for professional guidance in setting up and financing your franchised business.

Banks, such as Lloyds TSB, have a dedicated team of Franchise Managers, who will check out franchise opportunities and make an assessment whether they are prepared to support individuals investing in a particular franchise. They will also monitor and review performances of franchise owners within the network that already bank with them to identify any worrying trends and to regularly reassess the level of financial assistance they are willing to provide.

Franchise specialist banks generally view well-established franchise opportunities as less risky because you are investing in a tried, tested and proven business model with initial training and ongoing support. This usually means that they will finance a higher percentage of the set up costs to a franchise owner over someone starting up their own independent business from scratch.

Essential document

The importance of a good business plan cannot 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.

The plan should demonstrate you understand the business opportunity and unsurprisingly, a bank will only lend when it has a very good chance of being repaid. Banks can provide a business plan template for you to use. Accountants can also provide advice in producing a business plan, but remember it is your document and is too important to leave to someone else to write.

A business plan is a written document that provides an overview of the business, your objectives, market, management team and financial projections. It is often assumed that a business plan is just used to secure funding for the business. While this is an important benefit of producing a business plan, it can also assist with the management of the business such as monitoring the ongoing performance of the business against the original benchmarks and the identification of areas for development. The plan is a working document and should be regularly reviewed and updated as the business develops.

There is truth in the old saying, “if you fail to plan, you plan to fail”, especially when you’re starting a new business. Those who understand the benefits of business planning are more likely to be successful than those who react to day-to-day operational issues and are constantly firefighting problems. Planning a business is not a simple matter of scribbling down a few ideas.

If a franchise owner is going to make their plan work, a much more thorough approach must be adopted. A business plan is a useful tool to help gather thoughts and to set objectives for the business. It should demonstrate that there is sufficient demand for the product or service offered and that there is a good understanding of the market as well as explaining the competitive advantage or unique selling point that the business may have.

Positive impact

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. Think of those entrepreneurs on BBC Two’s Dragons’ Den. From the outset, many don’t stand a chance of securing the investment they are seeking because their presentation is poorly conceived or they don’t have a good understanding of the key financial information for their business. Consequently they are unable to establish their own creditability and project confidence in their business.

Careful planning and preparation should place the franchise owner in a better position to raise the required finance from a lender and to operate their business successfully. The business plan is the most effective way to crystallise your business objectives and provide a sense of direction. Used in the right way, a business plan is an essential tool, however crucially no business plan should be set in stone and should be regularly reviewed as the business develops.

An important part of the business plan is the financial projections. A Profit and Loss forecast will give you a projection of the possible performance of your business, how much of a return you can make and what is profit if any is available after all costs have been met. To prepare this report you need to establish what your likely sales will be, and what expenses the business will have to meet. It is important that the projections are realistic and it is advisable to speak with the franchisor or other franchise owners to establish whether the figures can be achieved.

Comparable business

Should you decide to speak with other franchise owners of your chosen system, it is important that you find out whether they were operating a comparable business to you in terms of size, premises, territory and staff. You also need to establish whether their level of drawings from the business is the same as yours. It may well be that someone single and living with their parents will have minimal requirement for drawing funds from the business, while another franchise owner’s circumstances could be different – having a partner, young family, large mortgage and personal financial commitments – which would mean that their drawings would need to be substantially greater.

The cash flow forecast looks at how money moves through your business. It predicts when people will pay you and when you will have to make payments. The cash flow pattern for your business will vary with a number of factors. If you are looking at a retail franchise for example, your customers will usually pay you when they buy the product, and you will often have an agreed time period in which to pay your suppliers. If you are dealing in a business-to-business market place, your customers will usually want you to give them time to pay and will expect to be invoiced for payment at a later date.

The cash flow forecast will show the effect of these timings and whether you may require an overdraft facility to assist with your working capital requirement. The ability to generate cash is critical to the success of any business. If the business cannot generate sufficient cash at the right time to meet payments due then there will be potential problems. Cash flow varies widely between different types of businesses and banks will support this type of finance through an overdraft facility. Factoring and Invoice Discounting may also be available to certain types of businesses as debtor management options.

Written by Richard Holden (pictured right)
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 Franchise Managers based throughout the UK to offer support to both franchisors and franchise owners. Lloyds TSB are affiliate members of the British Franchise Association.

Written by Richard Holden