Franchise finance: How to fund your franchise

Using your own money to buy a franchise may be possible, but it’s likely you’ll need more cash to get your successful franchise up and running. Here’s how to secure funding for your franchise business.

Every business needs money when starting up, and franchises are no different.

From the initial franchise fee, purchasing stock and setting up premises to ongoing operating costs, buying a franchise may require a hefty amount of capital.

Adequate funding is essential for the success of your franchise.

While you may have some of your own money to invest, it’s likely you’ll need additional franchise finance for your start-up.

While friends and family may be prepared to financially support your fledging business but most franchise owners will need to raise finance from a bank or other lender.

Buying a franchise can be a safer option than starting a business from scratch.

As a franchisee, you’ve a proven business idea to work with and an established business format to follow.

You’ll receive training and support from your franchisor, with help and guidance from a network of fellow franchisees.

As such, banks are often happier to lend to start-up franchises compared to other business start-ups.

To be successful, you’ll still need to carefully prepare your franchise loan application.

Here are our top tips for getting a franchise finance and funding for your franchise.

Research your franchise costs

Before you start loan shopping, it’s important to fully understand the costs involved in getting your franchise business up and running.

These may include an initial franchise fee, training fee, advance rent on premises, shop-fitting costs, vehicle lease, initial stock, equipment purchases, promotional costs.

You’ll need enough working capital to carry you through until your business starts making a profit.

Read our guide to the cost involved in buying and running a franchise.

Having established costs, you can now consider the potential profits of the franchise.

It’s important to be realistic with this.

Talk to the franchisor to understand how their financial forecasts have been calculated – these should be based on actual trading figures from existing franchise owners.

With this information to hand, you can now create a business plan for your franchise.

Create a franchise business plan

One of the first documents a lender will ask to see is your business plan.

Putting together a business plan for a franchise may be easier than for a traditional start-up as a lot of the information should be available from the franchisor’s brochure or website.

Your business plan should include the following information:

• Executive summary – a brief outline of your business, what it will do and how it will work.
• Personal details – your age, marital status, dependents and contact details
• Your experience and skills – and how they will help your franchise be a success
• Overview of the franchise – your customers, size of the market and competitor analysis
• Business operation – premises, stock, equipment and vehicles
• Management – the key roles in the business and who will fill these
• Marketing strategy – how you plan to attract and retain customers, details of advertising and promotions
• Financial projections – including cash flow and profit and loss forecasts
• Borrowing needs – how much money you need for the franchise
• Capital stake – how much money you’ll be investing in the franchise
• Personal finances – details of your personal assets, income, expenditure and existing debts.

Choose a franchise loan and a lender

Look for a lender that has experience of dealing with the franchise market.

Most high street banks have specialist franchise teams or departments – and as they already lend to other franchises, they can often provide valuable insight into your financial projections.

There’s a range of funding available for your franchise from secured fixed rate and variable rate start-up loans, to short term assets finance and leasing.

It pays to shop around for the best loan and interest rate that suits your personal and business situation.

You can also look for finance from other sources such as government grants and initiatives.

The government-backed Start Up Loans Company, for example can offer unsecured personal loans up £25,000 to small franchise businesses that have viable business plans.

How much can I borrow?

The level of finance on offer from lenders will depend on several factors.

With established franchise brands, the franchisee will need to provide at least thirty per cent of the total business set-up costs including working capital.

This should come from savings rather than from personal borrowing.

If a franchise brand is new or less well-known, the lender may require a larger capital commitment before agreeing to a loan.

Typically, you’ll need to secure the loan against a personal asset – normally your home.

If you lack adequate security but have a strong business plan, the Enterprise Finance Guarantee scheme may be able to help you borrow money by guaranteeing up to 75 per cent of the loan value with accredited lenders.

Not sure what finance to access? Why not read the Business Finance Guide from the British Business Bank?