No matter your experience, chances are you’ll need to borrow money to launch your franchise. And by avoiding these six common pitfalls you’re closer to making your business a success
Regardless of whether capital is coming from the franchisor, the banks or alternative lenders, there are certain considerations to best secure cash injections and get a new franchise off the ground.
Lenders are concerned with one thing: balancing risk against opportunity for return on investment. Franchisees don’t always have their business brains engaged. The result? Hidden or unsuspected difficulties which crop up time and time again.
Franchise ownership can be very profitable and satisfying. While securing finance can seem like rocket science, there are ways to increase your chances of success and, avoid the common mistakes that have been the bane of many franchises of the past.
(1) Don’t underestimate the cash requirements
Franchisees often forget about the upfront cash they’ll need. There are a host of costs that must be paid before any finance is available, meaning you must have a significant amount at hand. It can’t all be wrapped into a finance deal and paid for by the loan itself.
Lenders will typically want 10% of the value of any loan upfront and banks are unlikely to settle for anything less than 30%. Additionally, there’s the franchise fee which often stretches into the tens of thousands of pounds and beyond.
For example, let’s imagine a new gym will cost £350,000 to establish. Excluding franchise fees of around £15,000 there will probably be a need for at least £50,000 in order for a lender to consider the risk acceptable. Franchisees that don’t take this into account are unlikely to secure the funds they require.
(2) Own a house
A generally accepted principle is that 75% of a lender’s decision is based on factors related to the personal circumstances of the individual making the application, assuming it’s a new limited company.
Not owning a property can be a huge stumbling block as lenders will see this as a sign of instability, even if the sum borrowed isn’t secured against the property. That’s why home ownership is almost a pre-requisite for many applicants, otherwise the risk is seen as too great. This seems both unfair and hard to rectify if you’re a tenant – especially in parts of the world where property prices are prohibitive – but it’s a fact of life. Property owners are viewed favourably. Getting a personal guarantee can offset this and increase the chance of success.
(3) Have a track record
Similarly, if the applicant has no track record of running a business or zero experience in the sector they’re planning to operate a franchise in, then the investment will be seen as a riskier prospect. This is the case even when the applicant has a large amount to invest in the venture.
Getting out there and gathering experience can show dedication and bolster the chances of securing funds during the application stage.
(4) Do your research
Failing to have a full business plan with detailed projections is one of the single biggest pitfalls.
Franchises are just like any other new business and while they come with a lot of support, they’re still susceptible to market stresses and strains. Any lender will be aware of the latest trends and will understand, for instance, that gyms are doing well right now, while the burger market is somewhat saturated.
Both macro and micro economic factors are likely to be taken into account when applying for funding. Just because it’s always been your dream to own a bagel shop doesn’t mean now is the right time to open one and perhaps it won’t work in the location planned.
Visiting actual locations, looking at competitors both in the franchise world and out of it, talking to franchisees, going to annual general meetings and researching a franchise thoroughly will showcase dedication and lay the groundwork for success.
(5) Don’t jump on the bandwagon
While the pay-off for getting involved in a trending franchise early can be great, securing finance for these ventures can become more difficult either because you’re getting involved before the business model is proven or later when they’ve become enormously successful and overly abundant. Picking the right time and franchise will be instrumental.
(6) Always opt for realism over optimism
Prospective franchisees are often presented with figures that showcase the potential profitability of their new venture in a perfect world. These figures can be overly optimistic and don’t factor in important real-world variables, including the cost of borrowing money.
It’s possible to understand the cost of borrowing and factor this into any projections by talking to a finance expert early in the process. If these details are identified too late, then it has the potential to throw the whole business plan out of whack, reduce the likelihood of lending and throw a spanner in the works.