A vital consideration when thinking about a new franchise is finding the funds for it. Fortunately, there are various funding routes available to potential franchisees. One of the most popular routes is to get a bank loan or funding from a commercial lender – but any type of lender will first want some evidence that you can make a success of your business. Fortunately again, a franchise is easier to finance than a totally new business, as it’s deemed less risky and you’ll be able to point to the success of your franchisor and the services it already offers.
As a rule of thumb, most lenders are likely to ask you to pay about a third or more of the total initial costs of setting up your business from your own funds. As well as that, you’ll need some form of security for the loan – which will often be your home.
The amount you can borrow, and the cost of the loan, can vary significantly, depending on factors such as the type of lender, the interest rate, your financial circumstances and what type of costs the loan will need to cover. These could typically include elements such as the initial franchise fee, stock and wages in preparation for the launch of the business; the rental of your premises; business vehicles; working capital; business insurance; and marketing costs. There will be some areas, such as marketing, where the franchisor is likely to provide some input.
Any reputable lender will need to know that you are financially healthy. A bad credit history will make it harder to get a loan, whereas a good credit score will help considerably. It’s important to have a strong financial profile, so make sure you know how much you have in terms of savings and also any current debts. The clearer, more positive picture you’re able to present to a potential lender, the better. Your figures must also be supported by documented evidence, such as bank statements and tax returns.
The other aspect that a lender will want to see and review is a well-produced, compelling and comprehensive business plan. This needs to show that you’ve developed clear objectives; that you’re aware of any challenges; and that you know how to mitigate these. It should cover topics such as financial management; market analysis; and operational strategies. Describe your mission statement and your vision for the future of the business – but keep your figures realistic and achievable. To find out more, take a look at our blog, ‘Building a business plan for your franchise’.
There are various financing options available to potential franchisees. Some of the key approaches include:
Banks generally tend to see franchisees as a safe investment and might lend up to 70% of the amount you need – especially if other franchisees in the network have been shown to be successful.Franchisors often develop their own relationship with a bank and would therefore be able to advise you about the possible loans available and could help you with your application. Some of the High Street banks that have a special franchise section include NatWest, HSBC, Lloyds, Barclays and Royal Bank of Scotland. Home Instead recommends the use of HSBC for franchise loans.
Small Business Administration loans are a US scheme which provides loans of up to $5million for small enterprises. There are calls for the UK government to set up a similar programme. At the moment, the government has a Start Up Loans initiative. However, this only loans up to £25,000.
A few franchisors will help you to start your new franchise by providing some finance as part of the franchise agreement. Alternatively, they might have a specialist team who can help you find a loan; or they might have a relationship with a loan broker who could help.
These are high net worth business investors who are interested in helping businesses where there is a strong potential for growth and returns.
This British Business Bank initiative means that the government will guarantee up to 75% of your bank loan – which can be very helpful if you don’t have access to a lot of security. The scheme enables you to borrow up to £1.2 million from the bank’s commercial partners. To find out more, check out the Business Link section of the government’s website.
This government scheme is aimed at SMEs and will provide funding of up to £1 million.
Various grants are available (details can be found on the government website). The grants are often for specific resources or certain groups of people, but it’s worth exploring this option.
Before applying for a loan, it’s wise to seek some advice from an accountant to ensure you’re getting the best possible deal you can afford. When making the application, always make sure that you’ve read through and understand the terms and conditions of the loan. Do you meet all of the criteria that are set out, and are you happy about any conditions that are stipulated?
One of the main reasons behind the loan application form is that it enables prospective lenders to assess whether or not your new franchise is an acceptable risk. It therefore focuses on asking for evidence that you are financially sound with a good credit score; you have a strong business plan; and can provide realistic financial projections. Make sure you’ve double-checked all your figures and haven’t left out any important information that the lender might need to know. And don’t forget to ask for help from your franchisor throughout the application process, as they will have had plenty of experience in this area.
The lender will want to know about any experience or relevant skills you have; how successful and well established your potential franchisor is; how financially astute you are; and that you are aware of, and have planned for, any likely challenges or issues that could arise. So, as the old Boy Scout motto says: ‘Be prepared’. Have your facts and figures clearly laid out and be ready to answer questions about them. Before meeting the lender, also think about whether there are any questions you want to ask them – for instance, if you’re unclear about certain aspects of the loan or repayment holidays.
You’ll need to provide some sort of security for any reasonably large loan (say, over £25,000). This will often involve putting up your home as security: if you fail to pay back the loan, the lender can recoup any debts from your property. If you don’t have sufficient security, there are other options available, such as the Enterprise Finance Guarantee mentioned earlier.
Once you’ve submitted your application and the relevant supporting documents, the lender will need to check your financial details and credit score. If they are happy with these and your business plan, they will underwrite the loan. When you’ve accepted their offer, the loan will be disbursed – i.e. they’ll transfer the funds to your account. This can be in the form of a single lump sum or in installments. You can then access the funds – but be sure you spend them responsibly, and in line with your business plan.
You’ll also need to set up an achievable repayment scheme that will enable you to pay back the loan comfortably, within the boundaries of your expected business revenues. Stay in close contact with your lender so that if any repayment issues arise, you can discuss and resolve these quickly.
With financial items such as applying for loans, it’s always good to be proactive and aware of possible issues. As part of your preparation for receiving a loan, make sure you’ve looked through all the financial risks involved and any challenges that might affect your ability to repay the loan. This includes developing effective contingency plans and risk mitigation strategies.
So, talk to your franchisor; talk to other franchisees in the network; and look at all the options available before making your final decision about getting funding for your new franchise. This could be just the start of an exciting, golden opportunity for you…
Getting funding is one of many considerations when you’re considering investing in a home care franchise. By booking a call with our Franchise Development Manager Luke Spellman, you can ask all of the questions you have and learn more. Click here and arrange a discussion with Luke.