The UK Franchise Market

Financing A Franchise

Financing A Franchise

Whether buying a franchise or starting your own business, securing finance for the venture is probably one of the most important decisions you'll be faced with.

To help you through this mine field The Franchise Market has outlined the key-points to consider.

Preparing to finance your franchise

When considering financing, preparation is the most important aspect. This involves answering three basic questions:

1. Can I afford the debt?
2. Is the finance package offered the right one for me?
3. What security can I offer a lender?

Within franchising all good franchisors will insist that such issues have been considered as part of their standard recruitment procedures.

Lenders such as the bank, being risk-averse, also want to have their lending secured. There may be equity in your property or other assets such as a life policies or insurance policies with some value as security. As a general rule, the stronger the security, the lower the cost of the debt (interest) will be.

Lenders require applications to be presented to them, usually on their own documentation. The application forms should be submitted along with the business plans and budget. It is important to assure a prospective lender that all three of the above questions have been addressed.

Often franchisors have relationships with one or more financiers, who will understand the business and the specific financing needs of a franchisee. Sometimes, because of this relationship, the franchisor will be able to negotiate favourable interest rates for the franchisees.

Types of Lending

There are various options available to you as a prospective franchisee to borrow money, the most popular of which include:

1. Loans Secured by Mortgages over property

2. Bank Loans

3. Credit Cards

4. Small Firms Loan Guarantee Scheme

5. Personal Loan from family or friends

1. Loans Secured by Mortgage

If you have sufficient equity in the family home or another property, the lowest cost borrowing will be obtained from raising a loan based on a mortgage security over such assets. Lenders of funds secured by mortgages can usually offer the longest repayment terms and the lowest interest rates.

2. Bank Loans

Banks tend to loan monies for shorter terms. Securities vary from property to assets and sometimes (but rarely) small loans are made without security. Interest rates on loans are more likely to be variable which would usually make this a more expensive form of borrowing.

3. Credit Cards

The use of credit card facilities is probably the most expensive form of funding and should only be seen as a short term measure.

4. Small Firms Loan Guarantee Scheme

This is a government-backed scheme and will guarantee borrowing where security is not available. For details refer to: www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1074447105

5. Personal Loans from family or friends

Asking a family member or friend to loan you the money to finance your franchise should be the cheapest form of borrowing.

Personal Guarantees

A second form of security is a personal guarantee. Often these are provided by supportive family members. These guarantors take the risk that they will have to repay the lender if the borrowers business fails.

Many franchisors recommend their franchisees trade as companies of limited liability partnerships (corporate entities). When lenders make loans to corporate entities, it is normal practice for them to require personal guarantees from the directors and/or shareholders.

WARNING: Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.