In general anyone wanting to finance a business has three basic options:
- Use your own money – this is by far the quickest and simplest route to take but not many people are in that fortunate position.
- Borrow money from others – this might be an informal loan from family or friends or a formal loan from a lending institution like a bank; or
- Get others to invest in your business – this means that they will own a part of your business and share in the profits and the decisions.
While most small businesses startup with money from friends and family, there are still a large number who rely on banks for financing. Commercial banks and financing institutions recognise the lower risk profile of franchising and recognise that most reputable franchisors have tested and fine-tuned their businesses before franchising. Many franchisors have financing agreements set up with selected financial sources to facilitate rapid funding of their franchisees. This is an advantage but that doesn’t mean you automatically get accepted. You still have to submit the necessary documentation and meet the criteria set out by both the franchisor and the financial institution.
Working with your bank
Banks are in the business of making money in exactly the same way you are so they will expect you to demonstrate your determination and commitment and provide them with bona fide evidence of the likelihood of your success. Without this, they will not lend you the money in the first place. And if you can convince the bank that you are a good investment, then there has to be an excellent change that you can succeed. Herewith some tips to consider:
- Talk to the bank as soon as you know that you will have to borrow – don’t leave it until the last minute. All of the major banks have franchise desks that will assist with your application.
- Have a business plan to show the bank, and be very familiar with what is in it – you need to talk with confidence about the details of your plan. Even if you have had help in drawing one up make sure you engage fully in the process.
- If you ask for too little, your business may not be able to achieve its targets because you are strapped for cash to do the necessary marketing etc. And it may be difficult to ask for more later as the bank might not be encouraged by your progress to date.
- If you ask for too much, the interest charges may be too much for you to repay. If your financial requirements are irregular or seasonal then discuss this with the bank and agree on an arrangement that gives you the flexibility you need for a cost you can afford. Remember that if you can start trading with your own money (and remember that most franchisors require a large portion of the cost of a franchise in unencumbered funds) and can show progress (and hopefully a profit) from your own efforts, a bank will consider your application more favourably.
- Keep accurate records – this will demonstrate to the bank that you are in control of your business affairs, and
- Update your financial forecasts to give the bank confidence that you are adapting your requirements with the real situation experienced by your business.
What does the bank look for in a franchisee
The bank will do a full review of your background and reliability, your training, qualifications and track record, financial resources and suitability to run the business. It will consider where the repayment is coming from, future trading profits after allowing for all your other financial commitments or from the sales of an asset. The fundamental requirements include:
- How much money will you need?
- For how long will you need it?
- What do you plan to do with the money?
- Does the cash flow forecast show that you can afford to repay the loan?
- What are your alternative sources of repayment if you have a problem?
- Are there any contingency plans for any setbacks?
- What types of security are you prepared to provide?
- What levels of sales are needed to break even and are they achievable?
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