5 min read21 October 2019
Franchising is a means of starting and running your own business, with a proven format to operate by. It can also come with continuing support to help you along the way.21 October 2019
A franchise is when you open a business and operate under the name of an existing brand. This includes following their business model and structure. MacDonald's, Caffè Nero and Pret a Manger are all examples of franchise businesses.
Franchise finance is a collective term for products aimed at funding both start-up and existing franchise businesses. It includes things like franchise business loans, franchise invoice finance, franchise trade finance and franchise lines of credit. Franchise business loans, granted by banks and independent providers can also be a great way to get an operation off the ground.
It's common for all types of businesses to need some finance when starting up, and franchises are no different. From the initial franchise fee and set-up costs, to the day-to-day operating costs, buying and running a franchise can require a significant amount of capital. Even if you don't have the upfront funds to pay for all of this, there are a number of options to help with funding.
Franchises come in all shapes and sizes and as a result their costs can vary a lot too. These costs are specific to each industry and can greatly vary from business to business.
According to the 2018 NatWest Franchise Survey, setting up a business offering children’s music and movement classes can be as low as £5,000, while a franchised gym business could cost require initial investment of above £450,000.
In most cases, franchises are funded by a combination of personal funding and a loan or line of credit from a finance company or bank. There has been an increase in private equity firms purchasing franchises, but these tend to be for multi unit agreements.
As with any business loan, franchise loan eligibility is based on a number of factors – the prospective owner's financial history, the strength of their business plan and how the sector is performing more generally.
Banks may lend up to 70% of the total initial investment and this tends to be unsecured up to £30,000. Above this, lenders are likely to request some form of security – ordinarily the charge over a property. This compares well with the typical 50% for an independent business start-up. Some specialist lenders may go slightly higher than 70%, depending on the franchise. You'll need to have the remaining 30% available, and this should not be in the form of a loan from elsewhere.
1. Draw up your plan
Having decided how to finance your franchise you’ll need to write a business plan. This is a key document that can help your lender understand your financial position and how you plan to achieve your goals. It should include financial forecasts, information on the business operations and ideally have a detailed competitor analysis outlining how your franchise differentiates from other similar companies in the area.
2. Understand the franchise costs
The upfront franchise fee is only part of the total cost. It covers initial set-up fees such as purchasing equipment and insurance, as well as premises leasing costs. Working capital is also important. It can take time to establish a customer base and generate income, and until then working capital may be required to fund business and personal expenses.
3. Be realistic about earnings
Most franchisors will provide an estimate of expected earnings after a certain period, based on actual earnings from other franchises in the network. However, this doesn’t mean that every franchisee will generate the same amount.
iwoca is one of Europe’s leading fintech lenders, offering finance to small businesses. Our fast and flexible approach is well suited to the franchise investment process with applications that can be completed in minutes. You can apply totally online and our technology eliminates the cost and complexity of traditional loan applications.
Aside from iwoca, banks can also provide funding for those seeking franchise business. The leading banks in franchising include NatWest, RBS, Lloyds TSB, HSBC and Barclays. Each has its own specialist franchise department and a dedicated team dealing specifically with franchise business loans. They are all affiliate members of the British Franchising Association (bfa), the voluntary self-regulatory body for the UK franchise sector.
There is also the government-backed Enterprise Finance Guarantee scheme, primarily aimed at those who have had issues finding franchise finance due to insufficient security or evidence of previous business success. This offers borrowers an alternative source of finance to get their business off the ground.
The number of shops or outlets in the personal services franchise sector has more than doubled in the past 10 years. Personal services include spa and beauty services, elderly care, children’s entertainment, travel agencies and pet services. Hotel and catering franchise outlets have also risen by 55%.
These two sectors now account for 60% of the industry by unit numbers, compared with 40% in 2008, according to the 2018 bfa NatWest Franchise Survey.
Find the right franchise: Thorough research is your friend here. Read about franchises, visit their websites and request lots of information.
The initial meeting: This step involves meeting with a franchisor and is just as much for your benefit as it is theirs – it's a good way of getting a feel for the franchise brand and allows you to meet the people behind the business.
Franchise funding: Next, you'll need to decide which franchise finance option best suits the business you want to buy, and who will provide it.
The sign up and agreement process: Next comes signing – every franchise has its own terms which will be outlined when you meet and request the contract. Once the franchise agreement is signed, some franchises will require a certain amount to be paid to start the launch process, others may request all of the funds up front.
The launch: It's in everyone’s interest to make the launch as successful as possible, so although the franchisee will be expected to undertake certain marketing, promotion and sales activities, good franchisors will provide as much support as possible during the crucial early stages of the business.
It's not rocket science to say that setting up a business has costs, but a franchise loan can be a useful way to alleviate some of these. The injection of capital can help you to focus on the start-up process while making manageable monthly repayments. Some repayments can be spread over a number of years making them relatively small in comparison to shorter-term loans.
Running a franchise doesn't give you the same freedom that running your own business does. You'll be limited to operating in line with an existing business model which may not fully align with your local market or creative vision. This lack of operating freedom could mean that your business is more expensive than expected as you may have limited choice in suppliers or products.
Furthermore, franchise agreements don't last forever and typically are reviewed every five years. It's important to plan ahead in order to avoid unexpected challenges to your business.
Alison Coleman is a freelance writer and editor who covers topics such as business, start-ups and executive education. Based in the UK, Alison has written for Forbes, The Times and The Guardian as well as many other national and international publications.
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