What’s The Best Way To Finance A Franchise?
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What’s The Best Way To Finance A Franchise?

Starting a franchise can be an exciting prospect to manage your own business in a way that doesn’t compromise on the insecurity of being an unknown brand with unproven business practices. A more accessible route to entrepreneurship for many, buying into a franchise has a myriad of benefits; but these don’t come cheap.

Unless you’re able to supply the initial investment for buying into the franchise business as well as the cash reserves to make it through until the entity starts making a profit, you’ll need to secure some kind of external financing to get things off the ground. With the average franchise set-up cost estimated at around the £40,000 mark, it’s very common to seek financial support – and here, we cover off the basics.

What is Franchise Finance?

Franchise finance is the provision of a loan specifically designed to cover both the initial and ongoing costs of a new franchise. It usually comes from either a bank in the form of a business loan or directly from the franchisor.

Franchise finance is customarily used to cover:

Perhaps the world’s most famous franchise is McDonalds. They state that all franchisees must have at least £100,000 in liquid capital available and advises that location and equipment costs can top £1,000,000. While this is by no means the baseline for franchises worldwide, it demonstrates well just how ambitious franchised businesses can be.

How can I successfully secure Franchise Finance?

All good franchisors should be able to supply advice on the most suitable route for obtaining franchise finance, as it’s likely that the majority of their existing franchisees will have done so.

When approaching lenders, it is critical that you present a solid business plan. Creating one is likely to be a long and arduous process but is vital; and again, the franchisor involved may be able to offer guidance. A comprehensive business plan is the best way to demonstrate the viability and potential of your business and to reassure lenders of a healthy ROI.

Are Franchise Finance applications often rejected?

If your business plan proves to properly demonstrate the potential of success and is reinforced by positive background checks, it’s likely to be accepted. However, there are a number of factors that could result in a franchise financing application being denied. These include:

It’s important therefore, that you have and are willing to provide all relevant evidence ready to supply to the lender and that your business plan is comprehensive and realistic.

How much does Franchise Finance cost?

The exact cost of franchise finance is dependent on the terms of the agreement between lender and franchisee. Most high street lenders offer 70% funding to franchisees; and that’s based on a total investment amount including all relevant factors and not just the initial fee.

If you’re unable to obtain finance for 70% or for the amount needed, a business loan could be complemented with an asset finance agreement or a business overdraft.

The structure of repayments varies between lenders but many well established franchises have agreements in place with high-street banks that favours terms for their franchisees. Such finance options often mean repayments don’t need to begin right away so you can settle into business operations before worrying about money.

Other than the initial investment fee, what should I spend Franchise Finance on?

Most commonly, franchise finance is used to cover the large expenses of franchise initiation as well as to improve the cash flow of the business through its first few months. There are a lot of costs to consider aside from the initial fee, including:

What alternatives are there to traditional Franchise Finance?

If you’re unable to secure conventional franchise finance, or don’t want to, there are other options that franchisees can seek out, including:

The Government often introduce new grants to spark entrepreneurship through local businesses and many of these include franchise financing, but these vary and are often time-limited to apply for; so it’s worth checking in with your local authority to see what’s valid at the time you need support.

Franchise financing is a fantastic way to boost your bank balance ahead of your new venture. Banks, lenders and franchisors all understand the costs involved – and lenders in particular are sympathetic toward the cause because of their high possibility of decent ROI. Speak to your local lender today.

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