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.
Financing your franchise - To learn more about this author, visit Diarmuid Kieran's Website.
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