To Finance or not to finance

When buying a franchise one of the main things to consider is how to fund the purchase and set up.

To Finance or not to finance

When buying a franchise one of the main things to consider is how to fund the purchase and set up. Whilst it can be tempting to get one loan to cover all the costs, or even use cash to fund everything, there can be many benefits to using finance companies. You may also be surprised as to what you can fund through asset finance. This article will look at some of the benefits to financing and why you should consider incorporating it into your funding structure. 

What is asset finance

First of all let’s have a look at what Asset Finance actually is. The basic idea is a deposit, often small, followed by regular monthly payment over an agreed period of time. The length of time for the agreement will depend on the asset and how much the monthly payments need to be. You can finance many assets, kitchen equipment, ventilation, gym equipment, and computer systems to name a few. Vehicles can also be considered in this however there are a few different options for this depending on whether you want to own the vehicle at the end or not.  

This type of financing is normally viewed as reasonably easy to access due to there being an asset involved. Where banks may look at property or other solutions for security, the asset finance companies will have the asset they can get back if payments are not met. With the current lending environment currently still impacted by the pandemic its often important to look at a balance of solutions including asset finance as this can help to get your project funded. 

Let’s have a look at an example; a project overall cost is £300K, maybe a £100K or so is equipment that can be financed through Asset Finance. Which leaves £200K left to fund. If the bank’s lending policy is a ratio of 50/50 then the franchisee would therefore need to have £100K of personal investment and the bank will usually offer a £100k on a loan scheme. If a Franchisee didn’t take the asset finance route then they would need £150k of personal investment. This is £50k more of funds to find from savings or personal sources. This could make the difference on whether the Franchisee could make the project happen or not.

Maximising working capital

As with the above example, using asset finance can help bring down the overall investment for loan purposes. This can have a positive impact on your working capital and, as we have shown, you may not need to put as much cash down as your originally thought. In the early stages of opening your franchise any delays in starting to trade, or the first few months before you reach a break even, can often be a challenge, so being able to keep those cash reserves can just help to protect against any unforeseen challenges. It means the Franchisee has less stress, can enjoy the process a lot more and spend more time on the business rather than any potential money worries. 

Buying depreciation?

The age old saying, ‘buy what appreciates and rent what depreciates’ is really key here. Using your available capital to buy an asset at full price that will depreciate, often significantly, is not always the best approach. Asset finance as a separate credit line helps you spread the costs, but you do need to be sure that you do cover the depreciation of the asset and don’t look to finance over periods that are too long where an asset may need to be replaced more quickly. This helps you to maintain a sensible approach to your finance and can prevent any issues with having to find large payments every few years. This will vary on what asset you are buying and the agreement in place, however generally speaking financing equipment can make sense. 

Cash is not always king

The view that buying assets and vehicles is better as you own them and then have no ongoing financial ties to them, which in some cases can be true, however when it comes to the early stages of a business keeping cashflow in a good place is the main priority. Generally the more reserves you have available the better at least until your business has been trading a while and you have a good idea of its cash flow and it can be more resilient in the event of any issues that arise. Many finance deals can be flexible to make the monthly payments achievable.  

Corporation tax super deduction

Currently certain types of equipment, plant and commercial vehicles can qualify for the governments “super-deduction” of 130% writing down allowance. If this is important you will need to use Hire Purchase finance rather than leasing to ensure that you can be considered for this benefit. Speak to your accountant to be sure or contact d&t with your finance enquiry as we will always consider this for you.

Overall there are many benefits to using asset finance when looking at the structure of your funding at the start. In some cases you may need to use multiple solutions to get the best terms for the lending. Using an Independent Finance Broker who also looks at the bigger picture and helps to structure the best overall funding package is vital as they will do the leg work for you. Be wary of simple asset finance brokers who just have that snap shot relationship with you. It’s ideal if your broker is looking at have a longer term relationship and has the same goal as you which is a successful and sustainable business for you for many years to come.

ABOUT THE AUTHOR
Phil Archer
Phil Archer
RELATED ARTICLES