Raising Finances 

As you can tell, purchasing a franchise is a costly endeavour. The old saying holds true: you have to spend money to make money. Very few people have a bank account loaded with the amount of capital you’ll need to pay the franchise fee, purchase your premises, pay all incidental expenses, and make it through the first few months. 

Fortunately, there are many ways to raise finances to assist with your franchise purchase. You will probably have to borrow money, a concept which makes some people nervous. However, franchises are a relatively low-risk way to open your own business, and most people not only quickly repay their startup loans, but turn a healthy profit. 

Planning for Success 

The first thing you should do when you begin to consider financing is consult the franchisor. In some cases, the franchisor will actually extend a loan to assist with startup expenses. Alternatively, the franchisor may arrange to lease your premises, or have your franchise fee paid in segments rather than a lump sum. The franchisor knows you don’t have the capital to start with, and will often be willing to help. 

In many cases, the franchisor’s bank has a special arrangement with the franchisor as well. You may be pre-approved for a loan, or qualify for lower interest rates or special circumstances. Check with the franchisor and see if his or her bank can offer assistance. 

You should also consult the franchisor’s business plan, which should offer an idea of how long it will take to see a profit. It may also provide tips and ideas regarding how to finance your franchise. You can learn from the franchisor’s original business plan: how did he or she finance the initial startup? Are there any tips you can follow? 

Another excellent source of information is other franchisees. When talking with your colleagues, ask them how they raised finances for the initial purchases. You’ll be amazed at how creative and varied their responses might be!  

Banks 

Obviously, your primary source of financing will be the bank. When approaching a bank loan, keep the following points in mind: 

·  Lloyd’s TSB and HSBC Bank both have departments specializing in franchise loans

·  Be prepared to demonstrate your franchise’s financial success

·  Most major banks are willing to lend 70% of the startup costs for an established franchise, but only 50% for a new franchise.

·  Banks generally expect you to contribute the remaining amount from your own resources (ie, unborrowed).

·  Banks like franchises because they generally succeed, ensuring that you are a low-risk investment.

·  The bank will want to see your business plan. This is a vital piece of documentation. Your franchisor will probably be able to assist with this step. 

When assessing your loan application, banks consider the following points: 

·  Your background, financial history, and suitability to run a business

·  The type of financial aid you request

·  Where and how you plan to invest the money

·  The likely success of your franchise

·  Your financial forecast

·  Whether you have a contingency plan for repayment in case the franchise fails

·  The realism of the cash flow forecast

·  Whether you have security 

Of course, nothing is free, and when consulting a bank you also have to consider interest and fees. You may have to pay a fee for setting up the loan. When establishing an interest rate, the bank considers many factors, including the franchise’s past successes and failures. In many cases, the bank has a special, lower interest package for franchises. 

In a worst-case scenario, consider mortgaging your house or another piece of property. This is a bit of a risky venture, but so is any business scenario, and if you’re convinced your franchise has an excellent chance of success, it may be worth it in the end. 

The Small Firm Loans Guarantee 

Even if you have no financial security, you may still qualify for a bank loan under the Small Firm Loans Guarantee. This is a setup where the government guarantees the loan of small businesses looking to startup -- people who don’t have the financial assets to provide security for their loans. In the event that you default, the government repays the loan on your behalf. 

The basic elements of the guarantee are as follows: 

·  You pay a 2% interest fee as security. In exchange, the government guarantees 75% of your loan.

·  The guarantee covers loans of up to £250,000 with a term of up to ten years

·  The business must have been trading for no more than five years to qualify for this program as it targets new and unestablished businesses. 

Your financial lender will be able to provide more information about the SFLG. For a list of banks participating in this scheme, visit the BERR website: www.berr.gov.uk 

Selling Your Cause 

The business plan can’t be overemphasized as you endeavour to convince a bank you’re a good financial gamble. Your business plan should cover the first two to three years of your franchise. Again, your franchisor will likely help with this, but it’s still your plan, so make sure it includes: 

·  the products or services you intend to sell

·  where the product is coming from (ie, how you plan to produce or manufacture it)

·  your costs, including inventory

·  how products will be sold

·  associated costs

·  when you plan to recoup your initial investment

·  any plans for growth and expansion

·  projected income and expense figures

·  an estimated amount you’ll need if everything goes according to plan 

Remember when we talked about the franchise interview earlier, we said to treat it more like a fact-finding mission than a job interview? Well, this is the job interview. You’re here to sell the bank on yourself as a successful, reliable individual with a plan. 

The more money you want to borrow, the more knowledgeable the people you’ll present to. Keep that in mind and: 

·  dress appropriately in business clothing. 

·  prepare and rehearse a thorough presentation. 

·  carefully check your business plan for typos and unprofessional grammatical errors. 

·  be prepared to answer questions. 

Remember, if you can’t raise the necessary finances, your franchise will never make it off the ground. This is the most important step you’ll take in starting your business: make it count!