Most new franchise units are part financed by traditional business lenders, such as the high street banks and specialist franchise financiers. This means that most franchisees must go through the finance application process. Here, we offer our top ten tips concerning what you need to do if you’re applying for franchise finance.
1. Is finance the right option?
The first question you must ask when considering finance is whether taking out some kind of loan is the only option. Next, you need to ask yourself whether it’s the right decision for you. Though most franchisees will need to borrow at least a small amount, some may be able to cover most of the franchise investment with their own savings. The rest could be sourced from family, friends, or more informal sources. Loans can be expensive to repay, so it’s worth exploring other possibilities.
2. Do your research
No investment decision should be made without thorough research being conducted. This advice extends to your finance application, too. Shop around and try and find the lender that best suits your circumstances. There may be specialist lenders that offer finance for businesses in particular industries. There may be lenders who only finance franchises. You may find lenders who have formed partnerships with specific franchises. Different lenders will offer different terms and will finance your business venture in different ways. Don’t just opt for the first lender you come across – take your time and get the best deal.
3. Know your business
If you’re to finance your business most cost-effectively, you’re going to need to know the franchise pretty well. Having a good knowledge of how the franchise operates, the costs it regularly incurs, and where inefficiencies typically arise, allows you to determine the true franchise cost and borrow accordingly. A good way of working this out is by talking to existing franchisees and asking for their advice and insight.
4. Ask the franchisor for assistance
Though you’re not yet a fully-fledged franchisee, applicants should feel comfortable requesting help from their franchisor. The franchise model is based on this kind of close collaboration, and if a potential franchisee doesn’t feel comfortable contacting a franchisor for advice and guidance at this early stage, it may be a sign that the relationship isn’t as healthy as it should be. Generally, franchisors have a great deal of experience with franchise financing and should be able to help you through the process.
5. Cost everything, especially equipment
To understand precisely how much you need to borrow and how much setting up the franchise is going to require, you need to perform a thorough costing. A significant portion of this investment figure is likely to be for equipment and store fittings. If you can lease the necessary equipment cheaply from the franchisor, you could drastically reduce costs and lower the amount you need to borrow. If you can’t, you need to be aware that equipment often costs more than you expect and more than you budget for.
6. Calculate your expected profits
Franchisees need to calculate a relatively accurate estimate of the profit margins they’re expecting to make over the first few years of business. Though it’s unlikely that this estimate will end up right, franchisees need to try and make it as accurate as possible to ensure that they borrow a reasonable amount. You don’t want to end up short, or borrow too much and find yourself paying extra in loan servicing costs.
7. Calculate your expected losses
As well as calculating expected profits, franchisees also need to try and establish how much they can expect to lose during the initial startup stages. Most businesses aren’t profitable in the first few months, and these losses can affect how long it takes for you to pay back your loan. It’s also important to consider the possibility that your franchise venture doesn’t work out. If such an unfortunate eventuality were to arise, would you be able to handle the fallout? Financially, could you take the losses? While great reward depends on taking some risks, there’s a difference between affordable risks and risking everything.
8. What security can you offer up?
In many cases, you’ll need to secure your loan against something of value. Typically, this will be property. However, this is a big decision that won’t just impact your future, but the future of your partner and family. Consequently, you need to make sure that anyone with an interest in the item offered up as security is aware of this fact and that they’re comfortable with the decision.
9. Establish a timeframe
To ensure that the repayment of a loan within the agreed period is viable, you’ll need to create a timetable covering significant business milestones, your path to profitability, when you’ll make repayments, and when you’ll eventually pay off the debt. However, it’s vital that you give yourself a little breathing space and factor in additional time to cover yourself in case of unforeseen events and circumstances. This can mean adding anywhere from one to two years on to the total payment schedule.
10. Utilise professional expertise
Finally, when it comes to financing a new franchise unit, it’s a good idea to use as much professional advice and expertise as possible. This means having an accountant look over the terms of the loan agreement, as well as consulting a legal advisor if necessary. An intelligent businessperson uses all the resources at their disposal – especially professional expertise – so don’t be afraid to seek out an expert’s opinion.
When you start considering franchise financing, there’s a lot of things to remember. First and foremost, franchisees should seek the guidance and assistance of their franchisor and any legal and financial advisors at your disposal. You need to carefully consider whether borrowing is the right option for you and carry out all your research, due diligence, and planning to ensure that it’s financially viable.