So, you’ve found the perfect franchise opportunity. But, unless you’re in the lucky 10% of start-ups which don’t require funding, all that’s holding you back is the cost. Don’t let funding your franchise stand in the way of your business ownership dreams!
There are a variety of financing options available to help you get the money you need to start your franchise. In this article, we’ll take a look at some of the most common financing options for franchisees and explore their pros and cons.
In summary, finance options for franchises include:
- Loans from family and/or friends
- Bank personal loans
- Government-backed loans
- Overdrafts
- Home loans
Advice and Help from the Franchisor
First things first. Ask the franchisor for accurate startup costs. Not only will they provide the cost of the franchise package but also details of finance available from local banks.
They can also help you put together your business plan, financial projections and loan application thereby improving negotiations with your local bank manager. Franchisors also sometimes have special arrangements available in which they take on some of the financial burden of starting the new business. This is sometimes called “debt financing”.
Whenever in doubt, see what advice the franchisor can offer in terms of franchise finance and funding sources. They are often very experienced in helping new business owners handle the expenses of running their specific franchise. Furthermore, they might provide assistance and advice that you wouldn’t necessarily think of on your own.
Franchisors can provide cash flow support through money lending, but interest rates and repayment terms may not be ideal.
But don’t worry! There is a wide range of sources from which you can get the same finance which we discuss below.
Sources of Finance
In the vast majority of new franchises, some form of outside funding is sought. Its purpose is to ensure the business has everything it needs from the moment that the business begins, to the point where it reaches profit-making status.
Savings
This is not a viable option for everyone, as it requires you to have a substantial amount of capital tied up in savings. If you’ve been building a nest egg and would like to use it to help fund your franchise, in part or completely, you may find it much easier to obtain funding directly from high street banks or another source of lending.
Lenders typically prefer that they are not the only source of start-up capital. If you bring between thirty and fifty per cent of the franchise cost to the table, a bank will be much more likely to approve a loan for the remainder.
Unfortunately, while having this type of money on hand is crucial, not everyone is this well off to begin with. Luckily, there are other options for alternative funding sources that may be suitable.
The Bank of Mom and Dad: Family Loans
When it comes to financing your franchise, your first instinct may be to head to the bank. But before you start filling out loan applications, consider turning to your family for help.
Asking your parents or siblings for a loan can be a great way to get the money you need without having to jump through the hoops of traditional lending.
If you can make up even a small part of the cost of starting your business this way, it is to your advantage as your friends and family will not usually charge you high interest rates or require collateral.
However, be sure that you do not try to borrow more than your relations can afford. Be honourable in your dealings with them to keep your relationships on a sure footing.
The Bank of You: Personal Bank Loans
If your family is not willing or able to lend you the money, you can always take out a personal loan to finance your franchise. Personal loans are easy to get and can be used for any purpose, including franchise financing.
However, interest rates can be high and the repayments may be substantial, which can affect your personal finances.
Banks that provide business loans typically expect a franchise starter to have around thirty per cent of the total investment or the money needed to get started available in cash. This money should also represent no more than around seventy-five per cent, at the most, of your personal finances.
If the business struggles or is unsuccessful, the bank does not want you to have to risk the entirety of your personal savings and finances or endanger your financial well-being.
If you are interested in starting a franchise but do not yet have enough working capital to qualify for a business loan, the smartest thing to do is to be patient. Continue saving until you have enough money to make a strong shot at having a successful business without putting any undue strain on yourself.
The terms of a regular loan may vary depending on the lender, but generally, they offer loans from £300 to £50,000 with rates ranging from 4.9% to 29.9% APR. The repayment term of a franchise loan can be from 3 months to 10 years depending on the loan amount and your credit score.
Some advantages of a regular bank loan are:
- You may be able to borrow more than £25,000
- You may get a lower rate of interest if you have a good credit history
- You may have more choice of lenders and products
Some disadvantages of a regular bank loan are:
- You may need to provide collateral or a guarantor for larger loans
- You may face higher fees or charges if you miss payments or default
- You may not receive any mentoring or business support
Government-Backed Loans
There are different types of government-backed loan schemes available in the UK, depending on your needs and eligibility.
They generally offer lower interest rates, longer repayment periods, and more flexibility than conventional bank loans. However, they may also have stricter eligibility criteria, higher fees or charges, and more risk of default.
One example is a Start Up Loan, which is a UK government-backed personal loan for individuals who want to start or grow a business. You can borrow up to £25,000 with these start-up loans at a fixed rate of 6% per annum and repay over a term of 1–5 years.
To be eligible for a Start Up Loan, you need to:
- Be 18 years or older
- Live in the UK
- Have a UK-based business trading for less than 24 months
- Pass a credit check
Some advantages of a government loan are:
- You don’t need to provide collateral or a guarantor
- You get a fixed interest rate of 6% per annum regardless of your credit score
- You receive free mentoring and access to exclusive business offers
Some disadvantages of a government loan are:
- You can only borrow up to £25,000
- You need to have a UK-based business trading for less than 24 months
- You may face competition from other applicants as there is limited funding available
Overdrafts
A loan substitute that is more appropriate for short-term borrowing is an overdraft. An overdraft has the benefit of allowing for flexible repayment schedules, but the bank can withdraw the overdraft capacity at any time, and interest rates make it frequently a more expensive option over time.
Home Loans
Another common source of funding is a home mortgage loan/home equity loan or bank loan. While a home mortgage loan is likely to give you better repayment terms and a lower interest rate than a business loan of the same size, it requires that you put up your house as collateral. This means that the success of your business, and your ability to repay the loan, will determine whether you are able to keep your home.
You should only risk what you are willing to lose, and so you should be careful when signing loans that use things important to you as collateral. Make sure that you look at all of the other possibilities first – such as stocks, ISAs, bonds and insurance policies. Anything you have which has value can be used to secure funding to help you acquire a loan.
Grants
The amount of paperwork and tough competition required to apply for a grant sometimes discourages people. Yet, you shouldn’t let that stop you because there are many fantastic advantages to taking this path, despite their unwieldy application process.
Grants often span a wide range of industries, but frequently, applicants must meet certain requirements, such as the business’s location, size, and industry. Some grants are exclusively for SMEs, while others are for businesses that directly deal with local or regional issues.
A grant is frequently given to fund specific resources like tools, training, equipment purchases or hiring. As a result, your business can expand and the organisation giving the grant makes progress towards reaching its own goals, like promoting entrepreneurship among certain minority groups, for example. Therefore a grant is typically an opportunity once your business is up and operating.
A useful source of information about sourcing grants from government and private organisations can be found here.
Conclusion
In review, the most important things to remember when you are looking for funding for your franchise are first to make sure that you understand all of the potential costs, as well as the potential benefits, of running your own business and second to communicate your vision and goals to those lenders which can provide you with the best lending rates and the best repayment terms.
Be patient when you are putting together the business plan for your chosen franchise and collecting the funds for it, and if you do not yet have enough resources to start or buy a franchise business comfortably, wait until you do. It isn’t worth putting your home in jeopardy over a home equity loan if you have nowhere else to go, and it isn’t worth putting your life under great financial stress during the opening months of a new franchise business.
Wait until you are ready, and you will be able to focus your attention on your business without having to worry about your personal finances. Apply the same kind of care to the earliest preparatory and research stages of starting a new franchise business as to the day-to-day management and profit-making side of the business, and you will increase the odds of being one of those successful franchise owners who make it all work.
Please note: None of the above constitutes financial and/or legal advice. We advise people to seek their own professional advice suited to their personal circumstances. You can find franchise specialist legal and accounting services in our directory.
