Glossary

Franchise Financing

Franchise Financing

If you’re looking into running your own business but don’t want to take on the typically high risks associated with a start-up, acquiring a franchise could be the route for you. Buying a franchise means you’re buying into an established brand and don’t have to worry about a business model or the structure of your operation. Additionally, you’ll typically find the franchisor will offer you training and support where necessary to help you succeed.

According to the British Franchise Association (BFA), 97% of the UK’s 44,000 franchisees are turning a profit, while the franchise market as a whole has grown three-fold to £15 billion in the last 20 years.

An attractive prospect, then, but not one without its challenges – not least accessing the funding to purchase and sustain the franchise in the first place. That’s where franchise financing comes in – an alternative lending format that helps you access the finance for a franchise purchase and the associated running costs.

What is franchise financing?

Franchise financing comprises several products that offer funding for existing or start-up franchise businesses. Common forms of franchise financing include business loans, invoice financing, trade finance and lines of credit. For most budding franchisees, the primary form of franchise financing is a business loan that provides the capital necessary to open a new franchise or develop an existing one.

Franchise finance is a necessary funding element for many franchises to be successful. While in many instances parent companies offer financial support in certain facets of set-up and development, franchisees still often require support with a variety of ongoing costs and to maintain a healthy cash flow.

Thus, when it comes to areas like stock costs, employee salaries, utility bills and the ongoing maintenance and development of the business, external funding is required to keep spending on track.

How does franchise financing work?

In most cases, a franchise purchase is funded by a combination of personal funding and an external loan from a bank or alternative lender.

You can get both secured and unsecured franchise financing options, depending on the amount of investment you require. Traditional lenders like banks can lend up to 70% of the total initial investment unsecured up to a value of £30,000.

If you’re looking for more than £30,000, you’ll likely need to provide some form of security as collateral. Alternative lenders may be able to offer more than 70%, but this will largely be dependent on the franchise type and the nature of your proposal.

In any case, the conditions of your funding will be based on the strength of your financial history, business plan and the wider performance of the sector you’re heading into. You’ll also need to have the remaining funding necessary to complete your initial investment, but not via another loan.

One thing to note in this process – seeking funding through traditional lenders can be a drawn-out process due to the amount of due diligence involved. If you pursue a loan through a bank, you could be waiting for weeks for a decision on your application. Alternative lenders tend to offer a quicker solution, which can be vital for many applicants.

Who are finance franchise solutions suitable for?

Franchise financing is available for franchisees across a broad spectrum of sectors. In the UK, restaurant franchises are incredibly popular, with McDonald's, Dominos, Pizza Hut and KFC in the top six franchises. McDonald's alone accounts for 1,100 franchised restaurants as the UK’s largest franchisor.

Restaurants are just one major industry among many, however, and franchise financing is widely used in key sectors including retail, cleaning, hotels, gyms and pubs.

What can franchise financing be used for?

As mentioned earlier, franchise finance is an umbrella term that consists of many funding formats. Franchisees use cash advances for a number of different business areas, including:

  • Initial purchase
  • Cash flow
  • Acquisition of a further franchise
  • Stock purchases
  • Staff salaries
  • Expansion
  • Refurbishment
  • Marketing

 

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    How much does a franchise cost to buy?

    How much a franchise costs is a question that comes down to a few wide-ranging variables. Depending on the nature of the business, upfront set-up costs can range from anything from a few thousand pounds to six figures and beyond. According to the BFA, the average cost of establishing a franchise comes in at £42,200 (this includes franchise fees, working capital, stock and equipment).

    There are three key categories to consider when weighing up the potential cost of establishing a franchise:

    • Basic start-up costs: Including franchise fees, set-up costs and legal fees.
    • Day-to-day operational costs: Including ongoing fees and insurance.
    • Business growth costs: Including advertising fees and franchise renewal or resale fees.

    How to get financing for a franchise business – who is eligible?

    Just like any business loan, your eligibility is based on many factors, including:

    • Your financial history and credit score
    • The strength of your business plan
    • The performance of the sector you’re looking to go into

    There are also a few other elements to consider:

    • Your limited company needs to be registered in the UK with Companies House
    • Your business needs to be located in the UK

    Alternative lenders who offer franchise finance to you will base your eligibility on more than just your credit score, but bear in mind your financial history will play a considerable role in defining the terms of your loan.

    Some basic tips for financing a franchise business

    Before you apply for franchise financing, there are a few things you should make sure you have covered:

    • Have a plan: While you don’t need to develop a business model with a franchise, you do need a business plan. Your business plan will help a lender understand how you plan to make money and where you stand financially. Bearing in mind that loan applications hinge heavily on the quality of your business plan, you must put together a solid document that includes financial forecasts, competitor analyses and information on your business operations.
    • Understand the costs involved: As discussed above, establishing a franchise boils down to plenty more than just the initial franchise fee. You need to weigh up all the initial costs involved and be prepared to meet them.
    • Understand your realistic earning potential: While you’re getting to grips with the true costs of your franchise set-up, you also need to be realistic about what money will be coming in during the initial months. Building a customer base will take time, and while you will be able to get an idea of estimated earnings from your franchisor, it’s not guaranteed you’ll be able to achieve that amount.

    Looking for alternative funding? We can help

    While we don’t provide franchise financing, we do supply several commercial funding types to a wide range of UK businesses including cash flow financeinvoice financeasset-based lending and business growth loans. As a leading UK lender, we offer speed, flexibility and transparency with the strong credit base of a traditional lender.

    Want to find out more? Contact us today.


    BY Jessica Lambert

    13 April, 2022

    3MIN

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