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Where to find funding for franchise financing

Written by Dave Galvin on Thursday, 16 August 2018. Posted in Finance

A well-known phrase in business is “cash is king” – and it’s very true. Staff, overheads and suppliers will always need paying but, as any business owner knows, money is vital for many other factors too

Where to find funding for franchise financing

There are lots of reasons franchises need finance whether that’s expansion, working capital, starting up, refinancing, asset purchases or unforeseen disasters – the list goes on. Whatever your business, it’s likely you’ll need investment of some level at some point.

Sadly, the rumours are true and money doesn’t grow on trees. So what’s a franchisor or franchisee to do? Many business owners believe securing funding is one of the biggest barriers to their business journey. I’m pleased to report, however, that the days of a trembling visit, cap in hand, to your local bank manager are long gone. There are now many options available to those looking to acquire finance and, with a diverse range of funding opportunities for enterprises: if you’re hoping to grow, develop or start your franchise this year, you needn’t let a lack of finance thwart your ambitions.

The main thing before you even think about approaching an investor, is to ensure you’re prepared, professional and realistic as this can only go in your favour throughout the process. To succeed with an investment pitch, it’s vital that you know your business and your business plan inside out. There are experts available to help you do this but choose an independent agent or advisor to ensure you get the best deal from across the market, not just from a bank they might be affiliated with. They can also ensure your business plan is as strong as possible so you’re more likely to get the funding, which is well worth doing. As a franchise, you already have a proven business model, so you’re in a good starting place.

However, you’ll also need to show any investor you have a solid grasp on the business financials and explain exactly what makes money and any signs of success or potential concerns. You’ll need to be open with them about any weaknesses as transparency and honesty is essential for an investor to see. If there’s a major Achilles’ heel in your business, for example a strong competitor or a technological advance that you aren’t prepared for, you shouldn’t necessarily shout about it, but don’t try and hide it. Be honest and prepared to explain how you would look to overcome it. Trying to conceal a shortcoming from investors is unlikely to work and will just make you look dishonest.

Sensationalist TV shows like Dragons’ Den make the idea of asking for funding seem nerve-wracking. In real life, however, although you must expect your ideas to come under scrutiny, the actual meetings with bank managers or funding organisations will be much more relaxed, without the formal pitches and will be a two-way process.

Many business owners believe their personal bank is the only option to fund their business, though this couldn’t be further from the truth. There are far more than just the options below but this should give you a grounding. It’s important to take expert advice from specialists to find the best funding option for you and your personal circumstances.

Bank loans

Despite the negativity spread across the media, all banks are willing to lend money to businesses – it’s one of the main reasons they’re in business after all. Even though there’s money to lend and a variety of government and bank-led initiatives, it’s important to approach the bank in a professional and knowledgeable fashion. Ensure you can answer any questions confidently and consistently and have a watertight business plan. Take independent expert advice to prepare your application skilfully and also source the best options for you.

Remortgaging, personal or family loans

This is a valid option but be careful and consider whether you have sufficient finances to run the business and also maintain a contingency fund should it be required – for example, if the business isn’t as successful as hoped or if your partner is made redundant.

For family loans, ensure a properly drafted agreement is prepared, so terms are clear from the outset for both sides. Also consider how the worst case scenario, financially and personally, would be dealt with by both parties.

When remortgaging, the interest is usually lower than on a personal or business loan and repayment terms can be far longer. It’s not an easy decision though and it’s vital to ensure that both you and your life partner are happy to put your property up as security for the bank. 

Another option is an unsecured personal loan where interest rates can be lower than for a business loan. There are also no arrangement fees and potentially other incentives such as gift vouchers or rewards available. Weigh up your options carefully.

Leasing or hire purchase arrangements

For asset purchases in your franchise, consider whether the item can be purchased using a lease or a hire purchase agreement, which is itself secured against the asset. There are two types of leases. With an operating lease, you’re merely renting the item, whereas with a finance lease you’re purchasing. Banks will watch for you to consider these arrangements when you are looking to fund a franchise with capital assets, as it spreads the funding risk for them.

The amount available to a business depends on the type of funding, the type of business and the industry. Ultimately, any funder is simply looking for debt that can be serviced and repaid within their criteria, with an interest rate to match the risk and required return for them. An independent funding expert will be able to ensure you get the best deal. 

About the Author

Dave Galvin

Dave Galvin

The operations director at d&t chartered accountants is sitting on a wealth of knowledge about the sector, having previously held the roles of head of franchising and senior business advisor.

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