Many new franchisees borrow money to start their franchise, but before you start looking, research the process with this article.
The BFA (British Franchise Association) is the UK’s leading authority on franchising, dedicated to upholding ethical business practices and high standards. Established in 1977, it empowers businesses and individuals through accreditation, education, and expert guidance.
Good news
Lenders are generally more willing to advance loans for starting a franchise than for stand-alone businesses, all other things being equal. Usually banks will lend between 50%-70% of the franchise start-up costs, but as with any loan, several factors can increase or reduce your chances of borrowing.
Why lenders like franchises
Franchise start-ups tend to be more likely to succeed. The latest data from the British Franchise Journal 2024, compiled for the British Franchise Association and NIC Local, shows that 89% of all surveyed franchise units are profitable, rising to 95% after five years.
In contrast, figures from PwC show that startup businesses accounted for 46% of total company insolvencies in 2024, the lowest proportion in a decade – usually rates are over 50%, explaining why lenders are more keen on lending to people buying franchises.
A wide choice of financial institutions offer funding to prospective franchisees – the BFA website lists some of them on its list of advisors.
Phil Archer QFP, Head of Business Planning and Funding at the dt group, a consultancy that specialises in franchise accounting, business planning and funding, says: “I’d estimate that more than 80% of franchisees use funding to start their franchises, based on our experience of working with 40-60 franchise brands regularly and having relationships with over 100.”
The franchise arms of the banks deal with a ‘panel’ of franchises, so franchisors point prospective franchisees to the lender that they work with most often. Lenders know their panel franchises well, so it will usually make obtaining funding easier.
Competitive funding environment
Gillian Morris, head of Franchising at HSBC UK, says: “New and existing franchisees are benefitting from a competitive funding environment, with various providers funding new and developing brands. Funding solutions include asset finance, working capital facilities and term loans.”
Alternative to banks
She explained: “In recent years private equity and venture capital funds have also provided growth funding for franchised businesses. Whilst usually more expensive than traditional funding, growth funding can bridge the gap between equity and more restrictive bank debt.”
Franchising – attractive to banks
Explaining the attraction of lending to the franchise sector Morris said: “Banks, and non-traditional funders are drawn to proven business concepts and the associated stable cashflows. Historically, franchised businesses have a lower default ratio, according to the latest BFA survey, sponsored by NIC Local, which underpins continued appetite from funders to support franchised businesses. “
HSBC’s franchise track record
HSBC has had a franchise team for 35 years and provide funding solutions for franchisees to develop and grow their businesses.
How to choose the right funding partner
Finding the right funding solution can be daunting, but prospective franchisees have a head start on their non-franchised peers, because funders are drawn to franchising’s stable cashflows and proven business models, which opens a myriad of funding options.
Short-term solution – not necessarily right long-term answer
Morris said: “The landscape is competitive, but my advice to prospective franchisees is to choose a partner who understands franchising and particularly one who knows your chosen franchise system. They will be best placed to provide informed insight and guidance on the system, industry trends and growth opportunities, so the value they bring extends beyond traditional funding. The short-term solution may not always be the right long-term fit for your business.”
What about you?
Lenders assess your risk profile, typically including your credit rating, existing assets, overall financial position and what kind of personal guarantee you can offer. You may be asked to agree to a charge over a property that you own, which may mean lower rates.
Saving time
Some franchise consultants offer a free pre-qualification service. Archer says: “For prospective franchisees, it’s often a relief. Many are nervous about the money side of things and appreciate having a financial expert guide them through the reality of what’s ahead.”
Final pointers
Archer suggests that prospective franchisees seeking funds should consider:
- Sourcing more personal funds from savings, investments or through property refinancing. This may deliver better rates and deals. The banks usually offer the best rates and flexibility
- Don’t be afraid of secured lending, such as using your home as security, but seek advice if in any doubt
- It could be faster to use a broker (ideally an independent services provider)
Wilkins reflected: “At the BFA we encourage all prospective franchisees to do their research and choose funding partners carefully – it’s a decision that shapes the journey as you ‘Discover Your Tomorrow’ with a franchise opportunity.”
