By carefully weighing up their options and asking the right questions, franchisees can find their ideal funder
When franchise owners seek capital from a lender, typically they think about how much they can borrow and what it will cost. Of course lending criteria are paramount but there is another factor to consider: finding the right chemistry between funder and franchisee.
However, although having a good working relationship with your finance partner is as important as interest rates or repayment terms, recognising a good match in terms of temperament, knowledge and experience can be much harder than crunching the numbers. Money may be the primary motivation for getting together but what are the other ingredients for a beautiful union?
Weigh up your options
Most smaller businesses only seek a loan from their main banking provider. But, despite this, franchisees today have more choice, greater flexibility and a broader range of bespoke offerings available if only they know where to look. Established franchises often have existing relationships with funders and can make introductions between banks and franchisees, although even franchisors may not be fully aware of the wealth of options now on offer.
This is not to diminish the work done by the banks in the franchising field. Several of the financial giants have a strong track record working with franchises – HSBC, Lloyds Bank, NatWest and RBS have long boasted specialised franchising teams. And now challenger entrants to the UK banking scene, including Metro Bank, are also going after the franchise market.
The shame is many franchisees don’t realise what they’re missing when they only look to the big names for funding. While the financial establishment has had less appetite for lending to smaller enterprises after the economic downturn, a new generation of providers has emerged that wants to work with SMEs. Some call this industry fintech, others alternative finance or altfi. But, whatever the name, these providers are technology led, focused on creating new rules for business finance and have money to invest in firms with potential. Crowdfunding, peer-to-peer lenders, asset-based finance and short-term unsecured loans are all innovative options for franchises looking for capital. Savvy business owners will consider all possibilities, researching online or talking to experienced commercial finance brokers to find what’s best for them.
Lenders that understand
Just like in any romantic relationship, a franchisee wants a partner that understands them and their needs. At its most basic, this means finding a finance provider with franchising expertise. But, beyond that, it’s important to determine how well the lender knows your specific sector.
Our business, for example, helps established franchisees to grow and expand but we’re also strong in the food and hospitality sectors – as much as a third of the work we do is with firms in these areas.
Automotive and service-based businesses are also well-represented on our loan books. These are all industries that boast large numbers of franchise operations. Hotels and catering were the biggest growth areas in British franchising in recent years, according to the British Franchise Association, equalling almost 30% of the UK franchise total in 2015.
Additionally, it’s important to find a provider that understands what makes franchises tick, as well as the particular demands of your area of operation. Lenders with knowledge of a given industry will be better placed to discuss the pressures on a franchise in that sector and will be familiar with their common needs. It could be a coffee-shop franchise looking to invest in new equipment or a hotel hoping to extend a dining area to increase available covers. Perhaps it’s a need for bridging finance during a low point in seasonal trade. Experienced providers will know the most appropriate type of product for the circumstance.
The key questions
But how can you identify the right financial match for you? You should determine if a funder has a background in working with franchises in your sector, as well as calculating any charges on borrowing. To get more detail, simply ask questions. Don’t forget you’re weighing up funding providers as much as they’re assessing you.
Engaging with a potential lender before making your application could enhance your chances of success, as you’ll be less likely to make rudimentary errors when applying. They should also be prepared to offer guidance – if not, that’s a bad sign in itself. Even if the result of this is that you ascertain may not get funding, by learning this now you avoid the risk of a rejected loan application and the damage this can do to your future chances of securing borrowing. To avoid catastrophe, there are three fundamental questions budding franchisees must ask.
Firstly, what does the application process involve and how long will a decision take? When a business applies for finance, the need is often immediate, so find out how long you’ll wait for a result. How much paperwork is involved? Additionally, check if the lender can provide subsequent funds quickly if you may need it in the future.
Secondly, what lending criteria and qualifying factors are taken into account? Some franchises can struggle because they rent premises and the funder demands assets to secure against a loan. If you are hoping to use an asset as collateral, it’s sensible to know how much can be borrowed against it. Other providers may want evidence of consistent cashflow, which can be a challenge for enterprises with fluctuating income.
Thirdly, what penalties may be payable against a loan, including if the business settles up early? If the business is growing and you acquire the money to pay back the debt, ask if you’ll be penalised if you do so ahead of schedule. If you’re expanding, you may need further funds to invest at a later date, so you want to establish whether this is a relationship with a degree of understanding and flexibility.
The signs of a good match
On a simple level, any lender will want to see that a business is solvent; has a clear grasp on its financials and forecasts; has transparent and sensible reasons for seeking capital; and is demanding the right amount – both in order to achieve its stated aim and in terms of its ability to repay. But the secret ingredient – and a very positive sign for a franchise looking to borrow – is a finance provider that also wants to talk about the business’s potential for growth in the future.
Ideally, you want to deal with someone who is actively engaged in making your franchise a success. About eight out of ten of Boost Capital’s clients come back to us for a second or third tranche of funding and it is both gratifying and useful to develop such long-term relationships. We know our customers, as well as their companies’ progress, and they know us. It makes for a happy, hassle-free and mutually beneficial way of working.
Like marriage, the ideal is to find a long-term partner who will work alongside you, offering support and encouragement. If you can develop this winning formula, the relationship should be reliable, satisfying and lucrative for many years to come.