You’ve decided on the franchise you want, you’re looking at the application pack, and then it hits you, how are you going to pay for this investment?
Let’s be honest, franchising is not a particularly cheap way to achieve your dreams of owning your own business. However, with careful planning there are a number of ways to reach investments required in ways that ensure you make a success of your franchise.
Financing a franchise investment
All franchises require an initial investment to buy into their business model. This will be a binding financial agreement that is part of the Franchise Agreement. These can range from as little as £500, all the way up to £1 million. If you don’t have the initial cash available (a very common hurdle for most people), you might be left wondering ‘how am I supposed to afford this?’.
You have two options, borrowing from a private lender (family or friends), or going to the banks and taking out a loan.
Loans from the bank
The good news is that due to the reliability of franchises to become successful (9 in 10 are profitable1), Banks have become more friendly to extend credit to potential franchisees. Most franchises require at least one third of the investment to come from your own capital. This means that you will need to have at least some of your money in available cash, to make up the rest of the fee.
The global financial crisis has had a lasting impact on the banks and they are still careful with who they choose to loan money to. Domini Stuart, an expert on how to begin financing a franchise, notes that there are ‘three things the banks want to know’ about you2. These are:
Are you capable of running a business successfully?
Based on your background and interest in that industry
Will your projected cash flow cover your expenses?
As the old saying goes, cashflow is king, if you don’t have enough money to pay the bills, how are you going to turn a profit?
How much do you have at stake?
Referred to as ‘skin in the game’, banks will want to see a credible way for them to ensure they get paid as well by seeing what collateral you will back up the loan with
In recent years, a common theme from the British Government has been to generate an entrepreneurial spirit to ‘get Britain working’ 3. This has led to an increase in grants that are available for small business owners, which is great news for those looking at financing a franchise as it lowers the point of entry for a lot of people.
Based on your location, you may be eligible for these grants and schemes. To see if you can apply for them, check out the government list here.
Three Points to Remember
Franchising is not cheap, but careful planning can make the point of entry surprisingly lower than you may have thought
If you don’t have the start up cash, banks are finance friendly and will be able to assist you if you can prove you are worth their investment
The government has schemes available that could be available to you
Interested in what’s available in your investment range? Check out the latest opportunities here.
1 British Franchise Association, 2014
2 Finding Finance For Your Franchise Purchase, Domini Stuart, 2015
3 Conservative Party, Press Release, 2015Tags: franchise investment