What makes the franchise model so attractive to lenders?

Why are franchises so good at getting lender backing and what is it that lenders like about the franchise model? Let’s look at how lenders assess new businesses

What makes the franchise model so attractive to lenders

Viability of concept

Does the lender think the business idea is a good one? When launching a new restaurant, the lender wants to work out: Why is your location a wise choice? Why the type of food will be popular? Why will the customers pay the prices you are going to charge? When you look to open a new franchise the concept, pricing, and location have already been road-tested with success. It is a huge bonus to the franchise model that lenders do not have to consider viability of concept because it has already been proved beyond doubt.

Suitability of borrower

Are you a good fit for this business type? Perhaps you have made a career in sales, or property development; maybe you are a GP. Whatever your background, no matter how successful, a lender will want to know when apply for start up funding what makes you the right person for the job. Why will you make a success of this business? Sometimes lenders will decline decent credit applicants for a new business because they deem it to be too far out of the borrower’s skill set. That is once again where franchises buck the trend. Franchisees normally receive extensive training and ongoing support from the franchisor. A franchisee will normally avoid the typical pitfalls that a newbie to the industry might walk into because of the mentorship of the franchise. Knowing that there are an experienced set of hands on the wheel steering the franchise to success removes a lot of the concerns lenders have about new ventures and lack of experience.

Strength of proposition 

Does the business stand a realistic chance of making a profit and covering the cost of the finance? This should all be clearly laid out in the business plan and financial forecasts you will have to provide on application for funding. If you have ever attempted to produce a financial forecast for a new business, then you will know how wildly inaccurate they can end up being. The are a best guess, often driven more by optimism and less by concrete facts. Franchisees can use the financials of other existing franchises to help provide an accurate picture of the first 3 years trading – the NatWest 2018 industry study showed that 93% of all UK franchises were profitable. This is an invaluable asset to any franchisee seeking funding and can also allow lenders to accurately calculate affordability. 

What if it all goes wrong?

How can a lender mitigate risk and recover its losses if the business fails? Lenders will always look to take a personal guarantee when lending to a new start business. The strength of this guarantee is based on personal net worth (and to a lesser extent personal credit). If the lender is not fully satisfied with the concept and the suitability of borrower, they will want to know they are fully covered. This can mean that the borrowers net worth must be a least twice the amount they are looking to borrow. Your net worth can be tied up in property or in stock/share/bonds, but it must be tangible. What makes franchises so attractive is they satisfy the concerns of lenders better than other new starts and so they pose less risk to lenders. That is why lenders are often happy to lend without as much personal strength behind the borrower meaning it can be easier to open a franchise than to start a new business on your own. 

Lenders that understand the franchise model love it. Who wouldn’t want an industry expert in their customers corner steering them through turbulent skies and when they lend to a franchisee that is what lenders are getting. The franchise model confidently answers the lending industries most pressing concerns when it comes to funding new businesses. 

Why not speak to a franchise today and I’m sure you will be amazed at the level of support and guidance on offer?

Guy Sandys
Guy Sandys