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Financing your franchise

Written by: Diarmuid Kieran

Article Overview: Where you can get finance for your franchise.

Financing your franchise

Potential franchisees need to make sure they have their finances in order before they can go ahead with a franchise purchase.

Like any other business start-up, they need to have a solid business plan in place to obtain the necessary funding from a bank, although with franchises the bank will take the track record of the franchiser into account as well.

In general, major banks will lend up to 70 per cent of the start-up costs for an established franchise and 50 per cent for a newly established franchise, which is more than they would give to people starting an independent business.

This is because most lenders consider franchises to have a higher success rate, and thus a lower risk, than new businesses.

So, if you can answer the bank's questions with assurance and have the finances to back your answers up, you stand an excellent chance of running a business.

But any lender will also require forecasts of your cash flow situation for the first few years of running your new franchise and these estimations will need to be backed up by solid calculations and realistic expectations.

Here it is important to include an emergency plan if things do not go as plan, to show the lender that you have considered all eventualities and are prepared for taking on the franchise.

Lenders will also assess a potential franchisee's own personal financial situation and will require you to set out your personal expenses, such as household bills or a mortgage, in order to work out how much you can borrow.

Just like the franchisor, the lender is also likely to carry out a background check to assess the borrower's financial history, training, track record and suitability to run the particular franchise.

Once it has been established that the franchisee is a suitable candidate to grant a loan to, the lender will calculate exactly how much it can lend and here the amount that you can invest independently into the new business will impact significantly.

It is usual practice for lenders to expect the borrower to contribute between 30 and 40 per cent of the start-up cost with funds that have not been borrowed elsewhere.

The type of financing required also plays an important role and lenders may have different criteria for assessing those applying for overdrafts, loans or a combination of financial services.

Potential franchisees will also need to consider which type of financing would be the best option to cover initial start-up costs and if another type of credit would be best to pay for the day-to-day running of the business.

Security will be required before financial help will be given to a potential franchisee. This can be given in the form of equity on your home or guaranteed cash income that can be proven by the applicant.

However, if adequate security cannot be given, potential franchisees could consider applying for financing through the government's Small Firms Loan Guarantee Scheme.

This scheme offers loans to entrepreneurs whose lack of security is the only criterion stopping a traditional lender from granting them financing.

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Hello I am a franchise expert - Hello, I recruit franchise owners for successful franchise concepts based in the USA. Many of my franchises are looking to expand north to Canada in all major centers. I enjoy networking and answering questions about franchising. If anyone is interested in the franchise world or looking to buy a franchise then contact me. I have a wealth of information and like to help. Thanks for your time. Michael Somer
Re: Franchising Brokers vs Franchising Consultants - Franchise consultants are free and work with you without any obligation. they do not work for any one franchise but do get a percentage of the franchise fee when a franchisee that was registered with the franchise came from the consultant and the franchisee signs. They will try to match up your interests and skills to franchise businesses that are right for you. They can explain franchise guidelines and help you in any way they can. Franchise brokers usually get paid by the client and/ or franchise (generally get some type of commission). Additionally, they can get points or referral fee off the deal if they refer you to a lending resource too after they sell you on a franchise. Typcally they will try to sell a prospective franchisee on a larger deal so they get a larger commission.
Re: Which franchise would you buy? - The franchise to buy, the one that will succeed is the one that is either underrepresented or not represented in the community. Look at your community, identify what service is missing. That is the franchise to pursue. Too many people buy a franchise based on their "heart". A franchise is a "widget". I have found that once people began to investigate a franchise they had never thought of, but find their is a need; the entrepreneurial "gene" kicks in and they get excited. They began seeing the possibilities of success, and as they uncover the nuances of the franchise, they become more interested. It is the uninformed that are uninspired.
What is the Best Franchise? - As a Franchise Consultant I get asked this question on a daily basis. I work with clients to help them find the right franchise and through those conversations they almost always as me: "What is the Best Franchise?". There is no single answer for this question as the answer truly depends on the criteria you set as a perspective franchise owner. Meaning, maybe you want a retail location with 5 employees or a home based franchise with zero employees. Either way, the word "best" becomes relative to what is important to you. I realized quite some time ago that I could never "sell" a franchise to anyone. The only way someone will buy a franchise is if it makes sense for them & their family. Performing the proper due diligence is key to finding the best franchise for you.
Re: Franchising Brokers vs Franchising Consultants - I don't think you can really prevent this from happening but you must certainly be careful when you choose your franchise broker. My suggestion would be to talk to a broker from a reputable network such a FranChoice or FranNet. These people are good people. I guess you can tell right away if the broker is trying to get you to buy a specific franchise. If he tells you right off the bat that you "have to" buy XYZ franchise, well, to me it sounds like he's trying to "scam" you. On the contrary, if he really listens to you, really consult you and try to find out what's best for you, you will probably be able to tell. When I worked for Franchise.com, we had a brokerage unit called FranFit. The beauty of FranFit was that we were paid the same commission by the franchisor, whatever his industry or franchise fee. This way, there was no incentive for us to match a potential franchisee with a franchise or another. We were truly leveling the playing field and really looking for the right franchise fit for the buyer AND the seller.


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