Opening a franchise can be an excellent option if you’re keen on running your own business but want to take advantage of an existing proposition. However, as with starting your own business, a new franchise will need funding in order to get the business off the ground. This article will look at all the options and considerations you’ll need to factor when funding a franchise.
Why open a franchise business?
If you dream of owning your own business, opening a franchise can be an excellent option.
- A franchise is usually based on a proven business idea, meaning you will be copying a viable product, service or business.
- You won’t be alone in your endeavour; you’ll undoubtedly receive some degree of support and assistance from your franchisor.
- You’re not starting from scratch, either. Instead, you’re likely to benefit from pre-existing infrastructure, and the brand that you buy into may already enjoy some degree of public recognition.
In fact, the only part of owning a franchise that remains just as difficult as starting your own business is its financing. Initial costs remain a hurdle whether you want to open a franchise or get a start-up off the ground. Many people are interested in owning a franchise, but when it comes to sourcing the necessary funding, they’re quickly stumped.
If that’s your current situation, there’s no need to give up on your goal. Franchise financing might feel inaccessible, but you’ll be relieved to hear that there are options available. That means you should be able to obtain the necessary capital to fund a business.
What are the ways to fund my franchise business?
Some people turn to friends and family to invest in their business, but this isn’t an option or a desirable route for every would-be franchise owner. As a result, financial institutions have developed products designed to meet this specific need. That’s great news for people just like you.
You probably have many questions regarding how to finance a franchise business. Maybe you’re wondering “can I get a loan to buy a franchise?” The answer is yes, this is a possibility. However, it’s not the only one available, and before you approach any bank you’ll need a clear idea of the franchise financing you require.
We want to make the process of franchise financing as clear and easy as possible. Here, we’ll talk you through how to get funding to open a franchise. We’ll explain every step involved, from developing a business plan to successfully applying for loans and small business grants.
It doesn’t need to be a complicated process. Armed with the right information, you’ll surely be able to secure the funds you need.
Researching franchise costs
Owning a franchise requires an upfront investment. If you don’t have those funds to hand, then franchise financing is available to help you obtain them. However, you need to have a clear idea of the resources you require to start your business. That means you need to research your finance costs.
The amount of money required to open a franchise varies. It really depends on the type of business that you want to enter! Some franchise opportunities ask for relatively small investments that you may be able to cover with your own money. Others need much more. This can be frustrating when you’re sure that your franchise would be successful, but you don’t have the funds required to get started.
- Franchise fees
Before you do anything else, find out the franchise fee for your particular project. This will give you a good idea of the initial franchise financing you require. However, this won’t be your only expense. You should also find out if you need any training to start your franchise and how much this training will cost. - Premises
Next, you should undertake some research regarding premises. Find a few premises options and compare the cost of rent to get an average. Underestimating this cost will only cause you problems at a later date. Be realistic about how much you’ll need to pay advance rent on a property and how much it will cost to maintain it. - Equipment
Will you need to lease equipment or, more specifically, a vehicle to get your business started? This is another cost to consider! Even if you don’t require a vehicle, you’ll undoubtedly need to invest in some equipment to start your franchise. Get quotes for these items and include them in your finance costs. - Stock
Most likely, you’ll need to buy some initial stock at the start of your franchise journey. Franchise financing can help you make these purchases, but you shouldn’t simply estimate the amount you’ll need. Instead, speak to your franchisor for advice and ensure you’ll have enough money available to cover your costs. - Marketing
At this stage, it’s important to think ahead. Once you have your franchise, how will you promote it? Will this require investment? If so, it should be included in any application you make for franchise financing. - Working capital
You should also think about the working capital you’ll need to cover your operational costs until your franchise starts making money.
Some would-be franchise owners apply for less money than is really required because they think a large sum is less likely to be granted. It’s much better to be realistic and honest about the amount you actually need to succeed. Receiving an inadequate sum will only put you in a sticky situation.
Remember, every franchise involves start-up costs. Nothing you’re asking for will be brand new to a bank that’s experienced in franchise financing. It’s important that, before you apply for financing, you have a comprehensive understanding of the funds required.
Creating a franchise business plan
The next stage in the process is to create a franchise business plan. This is important because any institution that provides franchise financing will want to be sure that you’re fully prepared for the project and able to generate a profit. Otherwise, lending to you will be considered too risky.
This is where owning a franchise is much easier than starting your own business from scratch. You shouldn’t be facing a blank page when it comes to crafting a business plan. Your franchisor should be able to provide you with examples and advice to help you on your way.
Check the website or promotional materials of your franchisor for inspiration. They undoubtedly contain valuable information that you can include in your business plan. Do they have statistics regarding their success? Maybe you can include these figures to prove that your franchise has potential.
Here are some of the common areas you’ll need to cover in your business plan:
- Executive Summary
This is where you outline your plan for the business and explain how it will work. Again, your franchisor should be able to assist you with this. - Personal details
You’ll also be asked for personal details in your application, so include them in your business plan. When a financial institution provides funding, they’re interested in the individual as well as the project. Think about your experience, skills, and education and explain why you’re perfectly placed to ensure this franchise becomes a success. This will make your business plan more convincing. - Operational details
Your plan should include practical considerations like how your business will function on a day-to-day basis. In it, answer the following questions:- What premises, stock, and equipment will you use?
- How many employees will you need and what responsibilities will they undertake?
- Marketing
Any potential funder will be interested to hear how you plan to promote your business. Include this in your plan. How will you attract customers and keep them coming back to you? - Research
Show that your plan is rooted in research by referring to any competitor or customer analysis you’ve undertaken. Where money is concerned, data is always desirable. - Costs
Finally, it’s time to get to the figures. You should already have a detailed breakdown of your franchise costs. In addition to this, your business plan should explain how much money you plan to contribute to the business and how much you need to be externally financed. Your franchisor may be able to support you in making financial projections for the future of your franchise. This is helpful as it shows potential lenders that your business will be sustainable — and that their initial investment will eventually be returned!
This is your opportunity to prove that you’ve thought through the daily operations of your franchise at a deeper level.
Can I get a loan for a franchise business?
Yes. Franchise loans are available for people who need support with the initial costs of starting their franchise business. Getting a loan for a franchise business doesn’t need to be complicated.
First, you need to decide which lenders you want to approach. Why not choose banks that have specialist franchise financing departments? They’re used to dealing with this business model so they’ll know what to expect from your application.
You’ll also want to compare the different kinds of franchise loans available – and their franchise loan rates. Some have a secured fixed rate; others have variable rates. Consulting an accountant may help you determine which option is best for your business. As your franchisor has undoubtedly supported other franchise owners through this process, they may also have useful advice for you.
In the process of compiling your franchise costs and crafting your business plan, you should have developed a clear idea of how much you’re able to contribute and how much you require from franchise financing.
Another consideration is how much a lender is willing to borrow and how much they expect you to finance yourself. Some franchises require the owner to pay 30% of costs from their own personal funds. This would mean you’d need a loan to cover the remaining 70%.
Usually, you’ll be expected to guarantee your loan against a personal asset. This could be your home, for example. Of course, this is a big commitment to your business. If guaranteeing your loan this way isn’t an option for you, there may be alternative routes available. As long as you present a solid business plan, the Enterprise Finance Guarantee Scheme may be able to support your project.
Like any loan application, you’ll need to meet certain standards to receive the funds you need. A good idea, then, is to thoroughly research the criteria of each funding body in advance. That way, you’ll know which ones are most likely to view your franchise financing application favourably.
Can I get a grant for a franchise business?
This is another option. If you’re struggling to obtain conventional franchise financing from a bank, you may choose to apply for a government grant. In fact, it makes sense to research franchise grants before you apply for a loan. After all, many of these offer friendlier repayment terms than a conventional loan. Some don’t need to be paid back at all.
The government has a range of schemes available to support potential franchise owners just like you, so why not make the most of that fact? New schemes are being introduced all the time, so it’s a good idea to regularly google “franchise grants UK” and stay on top of what’s available.
Of course, competition for these grants can be fierce. That’s why having a polished and perfected business plan is especially important. The application process varies between grants. Be prepared. These processes can be lengthy, requiring multiple detailed submissions.
Franchise grants offer incredible support to entrepreneurs, but standards are understandably strict. Here are some quick tips:
- Give the application process your full attention to improve your chances of success. Remember, careless errors could jeopardise your case.
- Get the contact details of a person within the grant provider organisation, so you can contact them for guidance when completing your application.
- Ensure that you meet every deadline in a timely manner, or you may miss out on amazing opportunities. If you can submit early – do so! Grant money can run out quickly.
- For larger sums or more complex applications, consider hiring a consultant to help you. Their experience and knowledge could prove crucial.
Checklist: Funding a franchise
In summary, here’s are the main steps you’ll need to take to fund your franchise business:
- Research finance costs – include initial fees, the cost of renting premises, and any equipment, training, or stock needed.
- Develop a business plan – use pre-existing franchisor resources and your own personal information to build a solid business plan.
- Research available grants – check your eligibility and ensure you have all the relevant paperwork required to make a successful application.
- Research potential lenders – find banks that specialise in franchise financing and choose ones with the most favourable interest rates for your business.
- Submit applications for grants and loans – gather all information required and apply to the best schemes and lenders to finance your franchise.
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