To borrow or not to borrow (Franchise Finance)

Chris Roberts, Director of Franchise Finance Limited, offers his advice on borrowing to fund a franchise business.

It is not uncommon for a prospective franchisee with just enough cash to decide to use their own money and not bother to borrow.

This may be because they don’t want to pay fees and interest, because they don’t think the banks are lending (believe me they are, when there is a good viable proposition backed up by a good professional business plan) or because they simply don’t want the hassle. This is, in my view, likely to be a bad decision because, whilst things may carry on in a straightforward and unspectacular way, there are two other possible alternatives. One good and one bad. First the bad one!

The bad

In these difficult times it is possible that trading may not be as good as was originally expected and therefore the franchisee could start making losses and running out of money. An approach to a bank at this stage, where losses are being made and the business performance is well off its planned projections, will almost certainly be unsuccessful.
The business could easily go bust.

In reality, it would be much better to request a loan at the outset, say for 50%, when everything looks ‘rosy’ and the business plan demonstrates viability because the problem has not yet occurred. Therefore, when and if the problem does occur you have your own ‘safety net’ which you can use to get you through your ‘sticky patch’.

The good

Now the good alternative! Things may be going really well for you. Perhaps there are no problems and your accounts may show break even or even some profit and you decide you want to expand. Perhaps buy a second territory or another outlet. So because you don’t have any spare cash you decide to approach your bank.

Our experience, particularly in the current economic environment, is that the bank will require you to put in some further new money at that time, being often not willing to solely rely upon what you put in as your contribution at the outset.

Borrowing wins

So once again it would have been better to have borrowed at the beginning and kept some of your own money back to assist your expansion plans when you (and not the bank) felt the time is right.

The author of this article, Chris Roberts, is a Director of Franchise Finance Limited and a British Franchise Association Qualified Franchise Professional.

You can contact Franchise Finance to find out more about arranging finance now through Reed Commercial.

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Sandy Purewal

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