Entering the world of franchising offers the promise of established brand recognition, a proven business model, and ongoing support from the franchisor.
However, one of the most critical aspects of starting a franchise is securing the necessary funding. As a prospective franchisee, it is imperative to ensure that your financial interests are protected throughout this process. Much like in football, where strategy and fair play are crucial, navigating the financing landscape requires vigilance both on and off the field.
Assessing Your financing options
One concern that many prospective franchisees overlook is the potential for franchisors to “play it safe” and offer only their preferred lender. They have one lender and only their solutions are discussed. What if there are better options elsewhere? How will you know? This is where brokers come in handy. They can select from a number of lenders and find the best solution for you. However, ensure that the broker is truly independent and not influenced by commissions or affiliations with the franchisor.
The hidden pitfalls of single lender deals and broker/advisor “Kickbacks”
To safeguard your interests, you should ask critical questions about the advisor or broker:
- Are they part of a professional body?
- Are all their activities regulated, including the production of business plans and finance application packs?
- What are the fees to me? What interest rate “add-on” do they charge for their services?
- Are they paying the Brand for your introduction in any way?
- Do they disclose all the fees & commissions they will earn in a clear and professional manner?
- What is your future relationship likely to be with the advisor?
These questions will help establish if the advisor is acting in your best interests or just scoring for themselves. Given the current level of interest rates and the complexities of funding, you need the best team manager on the case. Shop around and ensure any advisor you select considers all your options:
- Bank facilities and government schemes
- Start Up Loans
- Personal funding like re-mortgaging, Family & friends, crowd funding etc.
- Asset finance
Ensuring Your financial interests are a priority
To come out a winner, work closely with your franchisor to understand their policies and relationships with brokers and lenders. A good franchisor will only offer fully independent advisors who play on your team, not their own.
Here are several steps to ensure you are getting the best possible deal:
- Know your team: Ask your franchisor if they have any financial arrangements with recommended brokers or lenders.
- Talent scouting: Ensure the franchisor’s recommended solutions are impartial and tailored to your specific financial situation and goals.
- Previous plays: Ask about successful strategies used by other franchisees, but remember the right solution will be specific to you.
- Understand your opposition: Confirm that the franchisor has disclosed all costs for your project, including fees, set up/fit out costs, contingency/risk mitigation, initial marketing, equipment, professional services, working capital provision, and timelines for launch of trading.
The role of the franchisor
A reputable and professional franchisor will only work with suppliers and advisors that prioritise the long-term success of their franchisees over any personal short-term financial gains. Indicators of a good franchisor include:
- Clear Disclosure: Providing comprehensive disclosure of any relationships with brokers or lenders, including any financial incentives they receive.
- Supportive Network: Offering a robust support network, including financial education and resources to help you make informed decisions about financing.
- Fair Practices: Encouraging you to seek independent financial advice and being open to working with fully independent brokers/advisors.
Conclusion
Securing financing for your franchise is a crucial step that requires careful consideration and due diligence. By focusing on protecting your financial interests, you can ensure that you are making the best possible decisions for your business.
Work closely with your franchisor, but also seek independent advice from a reputable firm such as d&t. Your goal should be to find a financing solution that supports your long-term success, rather than one that primarily benefits others. Remember, the best deal for you is one that aligns with your financial needs and business goals, ensuring a solid foundation for your franchise venture. With the right strategy, you’ll be on your way to becoming a true winner in the world of franchising.
