A complete guide to securing franchise finance for all UK franchise businesses.
Free franchise financing guide by franchise4u.
Franchise Finance – Fund Your Franchise in Easy Steps
The impact franchising has had over the UK economy cannot be overstated, and certainly cannot be ignored. With thousands of franchise businesses posting promising numbers each quarter and even the biggest of brands out there vying to economise their operations through franchising, it’s clear that franchising is here to stay.
If you are interested in buying and running a franchise business, you may already have followed our What is Franchising guide. We also recommend you go through our other guides to see if franchising is a good fit for you , how you can choose the correct franchise and how you can buy the franchise you select . If you are still in doubt, head to our Pros and Cons of Franchising page to weigh your options.
On this page, we will discuss how franchise businesses in the UK can secure institutional and private funding to help get their operations started.
What is Franchise Finance?
Franchise finance is a term used to collectively refer to financing products that are aimed at funding franchise businesses. Some of the most common franchise finance products in the UK are:
- Franchise loans
- Franchise lines of credit
- Franchise working capital
- Franchise letters of credit
- Franchise invoice finance
- Franchise trade finance
Without going into the niche types of franchise finance, we will limit this discussion to franchise loans granted by private lenders and banks.
How to Secure Finance for Your Franchise Business?
Securing franchise finance is, even though not entirely difficult, somewhat complicated. This is mainly because franchise finance is built on projected numbers, as opposed to trends of the past. Despite this, franchise businesses find it much easier to secure funding than regular businesses and start-ups. This is a direct result of the high rate of survival and profitability that franchise enjoy.
There’s more exciting news. We, at franchise4u, have recently partnered with some of the most experienced specialist lenders across the UK to introduce affordable, flexible and project-specific franchise funding solutions for would-be franchisees. Do get in touch with us to know more.
Let’s now discuss what steps you need to follow to raise the capital for your franchise.
1. Market Overview
It may not sound exciting, it may even sound unimportant. But the very first thing you need to do before applying for a franchise loan is to know what your market is.
If you are not experienced in market analysis, you can seek help from professional business advisers. An extensive market overview includes knowing the business potential of your products/services, understanding the average demand around the year, analysing the present competition and estimating how you can capture a large enough share of the market for your business.
In short, you will need to:
- Fully understand the business you are getting into
- Realise how your business intends to make money
- Survey the demand and competition
- Know where your business will stand in the next 5 years
Having at your disposal this knowledge is invaluable – not just to secure finance, but to know if, when and how your business is most likely to fail or succeed.
2. Knowing How Much You Intend to Borrow
One of the most common mistakes made by franchisees while applying for a loan is being unsure about how much they want, need and intend to borrow. This uncertainty, in the eyes of a lender, is an indication of where things are most likely to go.
Therefore, before applying for franchise finance, you need to know how much you exactly need to borrow. A conservative cost analysis and your own potential to raise the remainder of the capital are, in tandem, usually sufficient to convince lenders that the loan amount you are applying for fits your requirements.
Franchise fees can vary from £500 to upwards of £100,000. In addition, many franchisors require franchisees to demonstrate liquidity that can into thousands of pounds. When you add a variety of costs like training fees and the safety deposit, the initial working capital required to run a franchise can cost, on an average, £50,000 or more. Most lenders prefer to make up for up to 50% of this amount as a franchise loan. There can, however, be some exceptions – mostly in regard with established, nearly-guaranteed-to-succeed franchises – for which lenders can grant loans that cover up to 75% of the initial working capital.
3. Business Plan
A business plan distills every important bit about your venture into a concise document. In short, quick bursts, it can convey everything a lender, investor or stakeholder may want to know about your business. Needless to say, you should have an intriguing, well-thought-out and transparently drafted business plan at your disposal to bring lenders on board your franchise.
What is a Business Plan?
A business plan is a strategic document that identifies business goals and outlines the ways in which the business means to meet these goals within a stipulated period of time. Some important attributes of a good business plan are:
- Clearly identifiable metrics
- Unambiguous timeframes
- Transparent analysis of possible problems
Franchise Business Plan – Things to Keep in Mind
- Prefer precision over verbosity.
- Focus on numbers that paint a clear picture of your business.
- Use conservative projections.
- Do not rely on exaggerated, convoluted or confusing statistics, data or information to convey your point.
- Do not conceal negative points of financials.
Most franchisors provide a ready-to-use business plan template that franchisees can use. However, if this template isn’t what fits your requirements, it’s more advisable to build your own business plan from the scratch. Regardless of your choice, you can always benefit from the experience and expertise of the franchisor.
A typical franchise business plan will have the components as tabulated below:
|Executive Summary||Executive summary introduces the reader to your business with a brief description of the products/services, state of the market you wish to operate in and important financials.|
|Contact Details||The contact details of the proposer (the franchisee) for the reader’s reference|
|Mission Statement||The mission statement briefs the reader about the values and ethics of your business, along with goals that it aims to achieve.|
|Franchise Summary||In this section, the overview of the franchise business is presented to the reader. This involves a brief summary of the franchisor business and their brand, the reason for adopting the franchising model and the business strategy that the franchise aims to follow.|
|Industry Overview||Industry overview allows you to present important facts and statistics that justify the choice of industry your franchise will operate in.|
|Market Analysis||As discussed earlier, the market analysis involves an extensive study of the competition, demand and anticipated trends.|
|Operations||What day-to-day operations your franchise will undertake and how they will be performed are two points discussed in this section. It’s also important to list all the assets you will need to purchase or lease to support the operations. For example, expensive machinery, computers, printers, vehicles etc.|
|Business Management||This part will discuss your franchise’s relationship with the franchisor, the personnel management, on-site administration and other relevant factors.|
|Marketing Budget and Plan||You will present the detailed marketing plan for the next 1-3 years and the budget required for the same. This includes a detailed strategy towards product promotions, events, competitions, discounts, advertising and other means.|
|Funding Objectives||You will convey to the reader how much money your franchise will need upfront in order to commence operations. This number is arrived at after conducting an independent cost analysis, preferably certified by a professional accountant.|
|Personal Financials||A summary of your personal financials will include your assets, liabilities, average income, personal expenses and other important details. In some cases, lenders will follow this up with a credit check.
You may also express your readiness to collateralise suitable assets to add security to the loan you seek.
|Business Financials||Personal financials will be followed by franchise financials, including the projections for profits and losses for a period of 3 to 5 years. Cashflow analysis will accompany these projections.|
|References||To bolster your case for franchise finance, you may attach a certified summary of loans granted by other lenders to similar franchise businesses. You may also present the financials for the past 3 to 5 years for franchisees who worth with the franchisor you plan on working with.|
|Risk Analysis||You can, if you deem it necessary, include possible risks to your business venture and how you expect to deal with them.|
|Exit Strategy||Lenders will want to know how they can get their principal loan amount back. So, a presentation of one or more viable exit strategies is necessary to conclude the business plan.|
4. Approaching Suitable Lenders
As your business plan becomes ready, you can start approaching suitable lenders. Many banks and high-street lenders offer franchise finance solutions, but it’s important to remember that these off-the-shelf solutions may not always represent what’s best for you. To know more about customised franchise loans from top UK lenders, get in touch with one of our franchise finance experts.
Your franchise loan application should be accompanied by the business plan and other relevant documents. It’s important to not send your application out to lenders in bulk – just like any other loan application.
Before sending the application, you may also want to seek legal counsel to know whether you need to limit your liability in the business.
5. Enhancing Your Credit Limit
Once your franchise finance application is approved, you can expedite the setting up process. It’s essential, at this stage, to maintain regular communication with the lender, keep them updated with major developments and let them know that your business is on the right track. Good faith, in conjunction with regular repayments, can go a long way in helping your business access higher credit limits, faster loan approvals and more profitable opportunities.