Funding your franchise: What are the different options?
By becoming a franchisee you’re essentially buying into a concept which has already proven to be successful – as the research and development has already been done and any negative creases ironed out. This means you might be expected to part with a significant amount of money in getting your new venture up and running.
The good news is that franchising is widely considered to be a safer route into the world of business than, say, starting a company based on a new idea. Start-ups can be initially cheaper to fund but can also be much harder to keep afloat if you’re on your own. Franchising on the other hand provides a much stronger foundation to build off. Similar models will have shown that success is possible and prospective lenders will consider them to be less of a risk.
No one is going to hand you the money you need without seeing a good case in front of them. You will need to research your chosen franchise, make sure it’s the right one for you and be fully aware for what entering this industry might entail. Also ask yourself how much money you can afford to part with and what amount you’ll need to borrow, as there will come a time when you’ll need to pay this back.
You must not fear the bank loan, but in order to pick franchising as your next adventure you must be confident enough in your ability to make money. Most franchises need a little financial backing to get up and away – here are a selection of the best options:
Like all investors, banks are far more welcoming of franchises that come to them with a strong track record. If you’re investing in an established franchise, you can expect to receive around 70 per cent of the start-up costs. If you’re buying into a new franchise then you can expect to see their potential share drop down to around 50 per cent.
First, every bank will want to see a detailed account of how much you can commit to the project before they decide to put in themselves. This should include a recent version of your personal expenditure, household bills, mortgage and anything else tying you down. As you’ll be taking money out of the business to fund some of these costs, they’ll want to know how much you’re likely to take from the business.
Proof of financial security is also good way of showing that you pose little risk. A life policy with some value is one of the easiest ways of showing this, though you can expect the bank to perform a full review of your background check to assess your reliability.
Finally, it’s up to you to decide on how much you need to borrow. You’ll need to contribute at least 30 per cent of the cost of the franchise and say how you intend on acquiring the rest. Whether you’re looking for an overdraft, loan or a package of financial services, be clear with what you want to do with the money but be open to suggestions about how to get it. Remember, they’re the experts here.
Perhaps you’ve got your eyes set on quick growth and firmly believe you can repay the initial outlay within a short time frame. In that case you might want to consider contacting a local loan broker to have them set you up with a private lender. Although you may have to contend with a higher rate of interest, this won’t have too much of an effect on your finances if you’re able to clear your debt quickly.
City development groups are set up in order to give businesses the tools they need to get going and, subsequently, bolster the local economy. This support will occasionally extend to low-interest financing options, which is what you should be looking into. The likelihood is that they’ll want something in return for their gesture, so you should start to think about what seminars or workshops you could hold in order to meet your side of the deal.
Ever been told that ‘Cash is king’? Well just because it appears in almost every blog about finance, that doesn’t make it any less true. Perhaps you’re entering the world of franchising after receiving severance pay from your previous company? You may have acquired a lump sum of cash in another way – through retirement account settlements or otherwise. Well, what better use is there for this money than a safe investment?
Many people use franchising to re-create lost income or, better still, build additional wealth for their family. You’ll find that a successful franchise will guarantee a higher return for your money than the stock market, so why not have faith in the proven business model?
Phone a friend
If you’re completely set on what you’d do with the money if it became available, you should have no hesitation in contacting any friends, family members or ex-colleagues about your exciting business venture. Account for these people having less money to play with than a bank or private lender but getting more than one person on board will help you gain the funding you need.