As with any business, starting a franchise requires capital to cover the costs you need to get going, operate effectively, and begin generating custom.
However, a franchise business differs slightly from a typical business. Usually, an entrepreneur will come with the idea they want to turn into a company while proving the value of their vision when applying for funding. With a franchise, the concept already exists, created by someone else, and may have proven success already – you are just creating a new arm of that franchise.
Due to the differences, you may have to alter the way you seek finance. In some cases, you will use your own finances, but typically there will come the point where you need the help of external sources.
This guide details how to fund a franchise business, including the external support to utilise.
Is it easy to get finance for a franchise?
With an established franchise, it is more than possible to get funding, provided you look in the right places. It may even be easier to obtain finance – buying a franchise is often considered a safer option than starting from scratch, given that it is usually based on a proven business model under the overarching franchisor.
On top of this, your franchisor (who owns the business idea) will provide training, marketing and support to strengthen your venture and ensure you contribute to the franchise’s overall success, rather than going it alone like other start-ups.
This could make financers warmer to your finance requests, including more risk-averse lenders. It should also boost your application by showcasing other franchisees’ performance and relating it to your venture. This should also help you to secure investment if that is the funding route you choose.
What steps should I take to secure funding?
While starting a franchise has some unique benefits that should help you on your funding journey, it’s still essential to follow the proper process to secure finance that suits your needs. We’ve listed the steps below.
Start by researching your costs
There may be costs associated with starting a franchise, which may differ from an average start-up. Costs could include the initial franchise fee, training fees, ongoing royalty fees, rent for premises and expenses associated with fitting out your unit, purchasing or leasing equipment and vehicles, stock purchases and promotional costs.
By understanding the costs you will need to cover when starting your business, you can estimate how much you will need to raise in funding. This will assist you in narrowing down the most suitable lender and negotiating a deal that fulfils your needs.
Create a business plan
As with any business, you need a plan that demonstrates how you will operate and what you will do to ensure results. This plan should also effectively prove the potential value of your venture and convince a financer that supporting you is a good idea – either by offering them a return on investment or showcasing your reliability to pay back debt.
When creating a business plan for a new franchise, you must include information about the franchise and franchisor. Generally, this will mean exploring the overarching idea and format while explaining its effect on the specific market you are looking to bring it to. You will also likely have to detail the operational model, including the relationship with the franchisor (such as how much profit they will be taking). A lot of established franchisors will have templates that can assist in this regard.
Find a lender
Once you have created a plan and understand your funding needs, you need to find a suitable financer. This will mean shopping around until you find the most competitive deal that matches your preferences.
Firstly, this means choosing between debt or equity to determine which route you want to go down. You will then need to look at options under each to determine who can offer you the funding you need at the best terms. In the case of debt, this will mean looking for the lowest interest rates and associated fees. With equity, it will mean finding an investor willing to work with you for a stake in the business that you’re comfortable with.
You may also consider government-backed initiatives, including grants and loan schemes that may be relevant to your venture. The Start Up Loans Company, which the government supports, offer unsecured loans of up to £25,000 per director, provided they have a strong business plan.
Find out how much you can borrow
By this point, you should have a good understanding of your start up costs and ongoing expenses. You will need a combination of personal funds and outside funding to cover these costs.
For franchise brands that are already established in the industry, especially those who have already shown success, a bank offering franchise finance could provide up to 70% of the start-up costs. If it’s a newer franchise with less experience, this may be lower.
The maximum terms of any loan will also be tied to the franchise license term – for, if the licence term is five years, you won’t be able to get funding that exceeds this timeframe. Again, this could affect how much you receive overall and the repayment amounts.
If you happen to have assets to use as security, it could also increase the funding level you can access by lowering the risk faced by the lender.
Reaching out to different providers should help you understand how much you will be able to borrow. It might be possible to access funding from a number of sources to top up your funding until you have the sums you need.
Speak to an advisor
If you are uncertain of how to access funding for your franchise or are struggling to find exactly what you need, it is wise to speak to a financial advisor.
An advisor will take you through the various options available until you find one that works best for your needs. This will also take into account the relationship with the franchisor.
While this will be particularly valuable when starting your franchise, you can also find longer-term solutions for the ongoing running of the business or build a relationship with the advisor that you can return to as your funding needs change.
Conclusion
Starting a franchise can be an exciting time, giving you the opportunity to take an established brand and turn it into your own. However, the key to success is creating the right foundations with the funding you need.
While, in many ways, a franchise can give you improved access to finance, it is still essential to understand the market options and find the best solution for you. This will enable you to unlock finance that covers your start-up costs and fuels the longevity of your venture.
If you are looking to finance the franchise of your business, we can help you pinpoint the best funding options to fulfil your goals.
Get in touch today to speak to a member of the team.