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, (note that this is different from a business plan), 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?

Franchise financing typically involves a combination of personal funding and an external loan from a bank or alternative lender. With franchise financing, you can access the capital needed to cover the costs of setting up, operating, and growing your franchise.

The process of acquiring franchise financing begins with a thorough evaluation of your financial history, business plan, and the wider performance of the sector you’re planning to enter. Lenders take these factors into account when determining your eligibility for funding and the terms of your loan. You will also need to have the remaining funding necessary to complete your initial investment, which cannot be sourced from another loan.

When exploring franchise financing options, it is advised to seek expert advice from financial advisors or franchise consultants who can provide valuable insights into the franchise financing process and increase your chances of success. If you wish to speak to one of our financial advisors you are welcome to give us a call at any time on 020 7839 1980.

How long does it take to get Franchise Financing?

It is essential to understand that seeking franchise financing through traditional lenders, such as banks, can be a time consuming process. This is due to the extensive due diligence involved in evaluating loan applications.

If you choose to pursue a loan through a bank, you may be waiting for weeks to receive a decision on your application. On the other hand, alternative lenders tend to offer quicker solutions for franchise financing, which is ideal for applicants eager to get started with their new business venture.

How much can I borrow for Franchise Financing?

The amount you can borrow through franchise financing depends on numerous factors, including your investment needs, the type of franchise you wish to purchase, and the nature of your business proposal. Traditional lenders, such as banks, can typically lend up to 70% of the total initial investment unsecured, up to a value of £30,000.

If you require more than £30,000 for your franchise financing, you’ll likely need to provide some form of security, such as collateral, to secure the loan. Alternative lenders may offer more than 70% of the total initial investment, but this will largely depend on the franchise type and your specific proposal. Keep in mind that the more detailed and well researched your business plan is, the more likely you are to secure a higher amount for your franchise financing.

Always consider the earning potential of your chosen franchise before applying for financing. Conduct market research, consult with existing franchisees, and analyse the franchisor’s financial performance to establish a realistic expectation of your potential revenue. This information will not only help you make informed decisions but also strengthen your franchise financing application.

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. It is not just restaurants that can benefit from franchise financing, it is suitable for franchisees across various sectors, including:

• Retail: Retail franchises can benefit from franchise financing to cover expenses like inventory, store fit-outs, and marketing campaigns.
• Cleaning: Franchisees in the cleaning sector can utilise franchise financing to purchase equipment, vehicles, and cover training costs for staff.
• Hotels: Franchise financing can assist franchisees operating hotels or other accommodation businesses, helping them with property acquisition, renovations, and other operational expenses.
• Gyms and fitness centres: Fitness related franchises, including gyms, yoga studios, or personal training centres, can use franchise financing to cover equipment purchases, lease agreements, and other start up costs.
• Pubs and bars: Franchise financing can support franchisees in the hospitality sector, enabling them to acquire pub or bar locations, invest in renovations, and manage ongoing operational expenses.

What can franchise financing be used for?

As we have established, 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 – Acquiring a franchise does not just involve the purchase of a property to market your franchise from. Initial purchase also means buying equipment, inventory and involves startup costs.
• Cash flow – A cash advance can help franchisees with their turnover by providing immediate funds to cover expenses or take advantage of business opportunities, without disrupting regular cash flow.
• Acquisition of a further franchise – If you are looking to expand your enterprise, further franchise financing can provide you with the necessary funds to purchase and set up a new business in your chosen field.
• Stock purchases – With the necessary funds from franchise financing, your business will be provided with the means to secure additional stock when demand increases, and even take advantage of a supplier’s bulk purchase discounts.
• Staff salaries – During your initial purchase phase or unexpected expenses, cash advances will ensure you can pay your valuable employees and maintain business operations.
• Expansion – Franchise financing can provide the necessary funds to open up a new location, or boost the presence of your current location to expand your attraction to new customers.
• Refurbishment – A cash advance can help your franchise with the costs of outdated equipment, or give your current location a renovation of the interior or exterior of your premises, increasing its appeal to customers and keeping staff happy.
• Marketing – With franchise financing you can launch a successful new marketing campaign through innovative advertising, and improving your online presence to increase brand awareness and drive new sales.

How much does a franchise cost to buy?

Depending on the nature of your business, upfront expenses can differ widely. Franchise costs may range from a few thousand pounds to over six figures, and will likely be determined by several variables.

According to the British Franchise Association (BFA), the average cost of establishing a franchise in the UK is £42,200, which includes franchise fees, working capital, stock, and equipment. To better understand the potential costs associated with establishing a franchise, it is essential to consider three main categories:

• Basic start up costs: As we already touched on, these expenses include franchise fees, set up costs, legal fees, and other initial investments required to launch your franchise. Franchise fees can vary significantly depending on the franchisor and the type of business, with some charging a flat fee, and others requiring a percentage of your revenue. Legal fees associated with franchise agreements and other contracts should also be considered.
• Day to day operational costs: After setting up the franchise, you will need to cover ongoing expenses to keep your business running. These costs include ongoing fees, such as royalty and marketing, insurance, rent or mortgage payments, utilities, employee wages, and inventory. It’s crucial to have a clear understanding of these costs to ensure you have sufficient working capital to maintain your franchise.
• Business growth costs: As your franchise grows, you may encounter additional expenses related to expansion, advertising, and franchise renewal or resale fees. Franchise financing can be instrumental in supporting your business growth by providing the necessary funds for expansion or marketing campaigns.

How can I get financing for a Franchise Business?

Franchise financing is an essential aspect of starting and growing a successful franchise business. By understanding the process and requirements, you can increase your chances of securing the necessary funding. Here are some steps to help you access franchise financing:

• Develop a strong business plan: A comprehensive business plan will demonstrate your understanding of the market and highlight the unique selling points of your franchise. Include detailed financial projections, marketing strategies, and growth plans to showcase your potential for success.

• Maintain a solid credit score: Lenders consider your credit score when evaluating your franchise financing application. A good credit score indicates responsible credit use and timely debt repayment.
• Research franchisor requirements: Familiarise yourself with the specific requirements of your chosen franchisor, as meeting these criteria will be essential for franchise ownership.
• Prepare collateral or personal guarantee: Some franchise financing lenders may require collateral or a personal guarantee to secure the loan.
• Consult with professionals: Seek the advice of financial advisors or franchise consultants who have experience in the franchise financing process. Their guidance can help you navigate the application process and increase your chances of approval.

Who is eligible for Franchise Financing?

Your eligibility for franchise financing will depend on multiple factors, including financial history, credit score, business plan strength, and sector performance. When applying for franchise financing, it is essential to be aware of these criteria and ensure you meet the requirements. Lenders typically consider the following elements when assessing you:

• UK registration: Your limited company must be registered with Companies House in the UK. This registration ensures that your business is legally recognized and compliant with UK regulations.
• UK location: Your franchise business must operate within the UK, as your loan will support your local operations.
• Industry experience: Demonstrating relevant experience in the industry or business management can help convince lenders that you possess the skills and knowledge necessary for successfully operating your franchise.
• Franchisor approval: Prospective franchisees must obtain approval from the franchisor before securing franchise financing. This approval process ensures that you meet the franchisor’s requirements and have the necessary support for success.
• Collateral: Depending on the amount you wish to borrow, you may need to provide collateral or a personal guarantee to secure the loan. Collateral can include assets such as property, vehicles, or equipment.

Alternative lenders who specialise in franchise financing may base your eligibility on more than just your credit score. To maximise your eligibility for franchise financing, focus on developing a robust business plan, maintaining a good credit score, researching franchisor requirements, and being prepared to provide collateral or a personal guarantee if necessary.

Franchise Financing success stories

When discussing the successes of franchise financing we can take a look at the expansion of McDonald’s in the UK during 2022, where a total of 244 new restaurants were successfully opened and franchised.

The McDonald’s franchise model is one of the most successful in the world, with its well established brand, efficient systems, and proven track record of profitability. Prospective franchisees are attracted to the company’s strong support structure and the potential for significant returns on investment. The impressive expansion of McDonald’s in 2022 can be attributed, in part, to the strategic use of franchise financing to facilitate new restaurant openings.

Aspiring franchisees looking to replicate the success of McDonald’s in their own franchise journey should consider the role of franchise financing in their business plans. By securing adequate funding, they can establish a strong foundation for their franchise and navigate the challenges of business growth with confidence.

For the greatest chances of success, it’s always worth seeking out and working closely with financial advisors or franchise consultants who can provide guidance on the most suitable financing options, and help develop a sound financial strategy for your future.

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 finance, invoice finance, asset-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. It is worth enquiring with the Nucleus team about all potential loan options. We are always available to answer any outstanding questions you might have, so do not hesitate to call us on – 020 7839 1980 – alternatively you can request a call back at a time convenient to you.