Raising capital will be one of the first ports of call for a prospective franchisee. Fortunately borrowing from the banks has never been simpler
Buying a franchise requires a significant capital commitment. Fortunately for those looking to enter the industry, raising finance as a prospective franchisee is much easier than raising investment to start a business from scratch. Most established franchise companies will have negotiated funding arrangements with the major banks and a number of lenders have a specialist franchise department to deal directly with prospective franchisees.
Of course one of the main advantages of franchising is that the banks will look at you more favourably as a borrower compared with someone starting up on their own. For an independent startup, the banks will generally lend up to 50% of the total cost but for an established and proven franchise they lend 70% of the total cost. Terms and rates vary between the banks – though in my experience they're all trying to be competitive in this modern age. That said, you can’t just walk into a bank and walk out with a loan – there is a process involved and the bank wants to see your commitment to the business as well as evidence of your assets.
Make contact with at least two banks – your franchisor should be able to give you contact details – and arrange a meeting with their franchise specialist. How prepared you are and how you present yourself will certainly make a difference. Of course the ideal bridge to the bank is a professionally prepared business plan. One of the major things you’ll need to consider is exactly how much money you'll need. My recommendation is to add three to six months of working capital to the overall cost of buying the franchise. This will raise the total amount of money you need to pay back but it will ensure you have the funds to get the business through its early growing pains.
While the banks are keen to lend to the franchise community, you as the franchisee will also be called upon to invest some of your own money. It's important that you have liquid funds available and that you don't overstretch yourself. Franchises have a good track record of success. However, no-one can forecast for certain the performance of the business in the future – or indeed your own commitment – and if you don't have a safety net then you can easily find yourself in difficulty.
On top of this, you also need to be honest with your franchisor about the source of the money. There's no value in telling the franchisor how much money you've got when in fact you’ve taken a bank loan for that amount and are paying high interest charges. If the franchisor doesn’t know then they can’t help or advise.
But if you do your due diligence and work with your franchisor, raising capital for that new outlet should be a stress-free experience.