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Going it a loan?

Written by Ryan McChrystal on Tuesday, 07 October 2014. Posted in Finance

Franchised businesses are becoming more popular and your options for funding are many. But finding the right option for you can be tough

Going it a loan?

They say it makes the world go round – whoever ‘they’ are. The truth is, if you’re serious about making a business work, you need to think about the moola, clams, cheddar, dough, Benjamins and deng. In other words, the money. The first question anyone looking to buy their franchise should ask is: how am I going to fund this thing? And there are a plethora of options out there.

“You’re going to need to work out how much it’s all going to cost before deciding on one path or another,” says Mark Scott, director of franchising for NatWest. According to this year’s NatWest/bfa Survey, the average set up costs for a franchise are around £50,000 to £60,000, though in reality this can range from a few thousand to millions. So which funding option is best for you?

Family matters

Some franchisors actually provide finance to their franchisees but if you aren’t one of the lucky few, the immediately obvious place to look would be your own finance – whether that’s savings, investments or money from a recent redundancy. Sadly, for a lot of people the pocket money they’ve been saving since they were 12 isn’t going to be enough. “Alternatively you could turn to friends or family who are likely to support your vision,” says Scott.

This option has three major benefits: you have an extra pair of eyes on board to assess your investment; interest rates do not normally apply when borrowing from those you know; and, in some circumstances, the money may be offered as a gift. Lucky for some.

On the flipside, with family and friends there is always the danger they may ask for it back at some point when you are unable to, therefore affecting your relationship with them, Scott warns. That is why it is essential that clear conditions are set before accepting any money.

Loan ranger

Failing that, you could always pop on down to your friendly neighbourhood bank. “If you do manage to raise the initial 30%, banks with a dedicated franchise team will lend up to 70% of the total start-up costs,” says Scott. You may only need £5,000 to £10,000 to begin with. From there you have the option of going with a loan or an overdraft; whichever you choose will require a business plan, including profit and loss forecasts. 

“You could think of the plan as a business sat nav – you know where you want to go and you can see the route as matters progress,” adds Scott. Often your franchisor will have a template for your plan but, if not, banks have tools you can use.

A loan would be best used to fund set-up costs, such as the franchise fees, shop fittings and other capital expenditure. The great thing about some loans is that if you find yourself falling behind on repayments, financial flexibility plans are available to help get you back on track. For example, you could take a ‘loan holiday’, whereby you stop making payments for a short period of time and pick up the slack at a later, more convenient date.

Once the business begins to trade, an overdraft can be used to fund initial expenses, such as wages for staff during training. “This is also is a handy option if you are just looking for stock,” says Scott. While not always required, an overdraft may only be in place for the first 12 months. 

Viable alternatives

Instead of a loan you could opt for asset finance for a specific item, such as a van, car, oven or printing equipment. This entails using balance sheet assets – such as short-term investments or inventory – as security to obtain a loan or borrow money. Many franchisors have arrangements in place for asset finance.

Invoice finance could also be a viable alternative to an overdraft. This entails issuing an invoice to a customer for work undertaken – for example the cleaning of their drain following a blockage – with the invoice finance provider lending you a percentage of the money due on the unpaid invoice, which could be up to 80%. When the customer pays the invoice it goes to the invoice financier and they pay you the remaining balance minus interest and their fees. 

If you use a factoring service, the invoice finance company will even issue the invoices for you and chase for payment, though the costs, as a result, are normally higher. “This is only relevant for franchises that operate in the business to business sector, rather than retail or business to consumer,” Scott explains.

Working the crowd

Crowdfunding is the new kid on the block in financing and while it isn’t used prominently in franchising now, Scott believes it could become more widespread in coming years. 

In a nutshell, it is a process whereby money is raised in support of your business through a growing number of social networks which facilitate contributions from the general public. Crowdfunding success stories can be intoxicating – going from zero to hero in days – but examples are few and far between. “Evidence shows that crowdfunding can work for some enterprise but it is not necessarily the right solution for all,” says Scott.  

In most cases if you don’t raise all of the money, you don’t get any. One significant drawback is that the very kind of people who donate will sometimes get a stake in your business, which leaves you with less control of your new venture.

Buying a franchise can be a life-changing experience but, as Scott says, “first you must get the funding right.” 

About the Author

Ryan McChrystal

Ryan McChrystal

In a previous life McChrystal wrote about asset management in the Middle East. A history and politics graduate from the north of Ireland, he now focuses his efforts a little closer to home. When he's not knee-deep in journalism McChrystal fancies himself as a bit of a globetrotter. In the summer of 2014 he completed his second US road trip, spanning the east coast, but Americans will be glad to know he'll be giving them a break for a few years before returning. McChrystal is a music geek and proud parent of a dwarf rabbit named Dylan.

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