Advice
on Raising Finance for a Franchise
Finding the
right franchise is no easy feat. It can take huge amount of time
and effort to research various industry sectors and the variety
of franchise opportunities that are available. But the hard work
is worth it. As any franchisor will advise you, they won't award
a licence to the first hopeful candidate that walks through the
door and will be looking out for evidence that you have the skills,
experience and attributes to take on the licence and make a success
of it.
It's equally
important that you as the franchisee are also selective. As with
any commitment, it's vital you're sure it's right for you before
you take the plunge. Once you've made the decision go there are
many issues you'll need to consider - and one of the most important
of these is how you'll finance the franchise.
There are
many different ways to finance a franchised business but no application
for financial support is possible without a robust business plan,
setting out your business idea, objectives, the background and
abilities of the business owners, financial requirements and projections.
The length and complexity of the business plan may vary according
to the amount of investment or finance that you are looking for.
To give yourself the best shot at securing the funding you need,
you'll need to take responsibility for writing the plan and you
should be able to confidently present it to an audience.
Some potential
franchisees will be able to fund their purchase using their own
resources, for example their own savings. Most people however,
will need to find some form of financial support and advice -
and more often than not they will turn to a bank.
Franchisees
have a lot in their favour when approaching banks for funds. A
franchise is by its nature, a business that has already proved
a success. The help given to franchisees in the way of training
and development by the franchisor, means there is constant support
for the business from above. And the fact that the franchisee
will be following a tried and tested business system means that
the business is likely to grow faster than a stand alone start
up, and is less likely to fail.
As long as
franchisees can provide a well constructed business plan and with
adequate personal investment to set up the business and security
to cover the financial request, their bank should be willing to
provide funding. Typically a franchisee will need to invest between
30-50 per cent of the start up costs and the request for funding
will be subject to full credit assessment from the bank.
Banks will
be looking for evidence that you as the franchisee will be able
to manage the repayments and the terms of finance, on which they
agree to lend you the money will reflect the amount borrowed,
security provided and the strength of the overall business proposal.
Advice: Remember it is a competitive market and banks are always
looking out for strong franchised business, so it can really pay
shop around for the best available deal.
There are
a several types of financing franchisees might want to consider.
Short term working capital is usually financed by an overdraft
facility, which provides flexibility and only accrues interest
when the facility is actually being used. There is usually an
annual arrangement fee for setting up an overdraft limit.
Another type
of financing is factoring or invoice discounting. This is where
a company takes a payment from a specialist 'factoring' firm in
order to bridge the gap in their finances while they wait for
invoices to be paid. Late payment is an issue that many small
businesses come up against, but factoring can help ease the strain
that can be pled on cashflow, where a companies invoices aren't
paid on time. Typically a factoring company will pay up to 90
per cent of the outstanding sum.
If you're
looking for longer term arrangements to finance any assets of
the business, a business loan is usually best. It will give you
a structured repayment programme and the option of setting interest
rates at the outset, to give you the security of knowing how much
you'll need to repay each month. Banks will usually charge a one
off arrangement fee at the start of the loan.
Sometimes,
assets for the business such as vehicles, machinery and computer
equipment can be purchased through asset finance companies. Usually
the asset financing company will retain ownership of the asset
until the full outstanding amount has been settled. Repayments
are usually made monthly over an agreed term from the outset.
For large
investments in excess of £500,000 it is worth considering
venture capital firms. These companies will provide funding usually
in exchange for a shareholding in your business or some form of
controlling interest or input into its running. One point to bear
in mind is that venture capitalists will usually look to invest
in firms that are established, and potentially, if not actually
profitable.
Of course,
for some there will be the option of borrowing from family and
friends. A clear advantage of doing this is the flexibility it
will give you to repay - but it is still important that the terms
of the agreement are set out clearly from the start. While borrowing
from a relative or friend may mean you have more flexibility,
it can also leave more scope for things to go wrong. Arguments
over loans are not uncommon, so to avoid things turning sour,
you should not enter into any agreement lightly.
Whichever
route you choose or advice you take to raise financing for your
franchise, it's important that you remember the responsibility
that comes with borrowing money. Hopefully, you won't encounter
too many problems, but if you do experience difficulties or even
if you're simply looking for advice you should speak to your bank
or investor. As always, the earlier you highlight any potential
issues, the better. However, the most sensible course of action
is to take as much advice from your financial services provider
as possible on the various options open to you, before you make
any decisions on how you raise financing for your franchise.
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