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Franchise Finance
Opening a franchise is a secure way to own a business - and more importantly, a profitable business.
Statistics published in a 2018 joint report between the British Finance Association (BFA) and NatWest, show that 93% of franchises were considered profitable in 2018.
While those figures (the latest available) predate the pandemic and financial instabilities to have affected businesses in the UK during the following years, they do show the strength of a franchise and its reliability as a business when compared to an original venture - over a third of non-franchise small businesses are expected to fail in the first year alone.
Opening and running a franchise needs capital, however, so how can you obtain that capital and join the world of business as a successful franchisee?
At Clifton Private Finance we have the answers - read on to learn all about franchise finance and how it can work for you.
And to speak to an expert about the best options for you, you can book a free consultation below.
Table of Contents
What is Franchise Finance?
What are the Costs of Setting Up a Franchise?
The 3 Best Franchise Finance Options
How Do I Get Franchise Finance?
What Alternatives Are There to Franchise Finance?
Franchise Finance with Clifton PF
What is Franchise Finance?
Joining a franchise is like buying a ready-made business. You get all the support you need to run your business, but it comes at a cost.
Setup costs for a franchise are not inconsiderable. There are a huge range of franchises available, from those with minimal investment needs, to major top-brand franchises that require substantial capital.
Franchise finance covers a range of industry-specific bank loans, designed to get you the franchise you need, as well as encompassing a selection of asset finance arrangements that will help you with much-needed equipment, and ongoing lines of credit for your running cashflow.
What are the Costs of Setting Up a Franchise?
With franchising existing in many sectors, from white-collar office work that can be done from home, to managing a luxury hotel resort, it’s impossible to quote figures. However, the areas that need to be considered are the same for all franchise businesses and encompass the following:
The Franchise Fee
The initial franchise fee is the cost of purchasing the franchise and can vary wildly depending on the brand involved.
Some small franchises may have an initial franchise fee of only a few thousand pounds (there are a few that can be bought for mere hundreds), while major franchises can cost hundreds of thousands.
Premises
Some franchises do exist as work-from-home opportunities, but a large number will need premises of some sort to run from, whether that’s a small kiosk or a full-sized commercial property.
As the franchisee, the onus is on you to secure and pay for that premises. This can mean a couple of hundred pounds a week in rent, right up to the investment of a sizeable commercial mortgage.
Fittings
Kitting out your building with furnishings is a key part of getting the premises right.
Not only that, but a number of franchises require specific fittings as part of their uniform look and there are likely to be costs associated with that.
Equipment
While some franchises are there to help with the supply of equipment, especially if they have bespoke machinery that’s necessary to run the franchise, others will expect you to source and supply your own equipment.
Running Costs
Any business takes time to reach a profit-making stage. While having a franchise means you are hitting the ground running, it could still take months before you are completely self-sufficient.
Franchise Royalties
While not a startup cost, it’s important to understand that as a franchise, you will be liable for ongoing royalties. Typically these are a percentage of your monthly gross income, and can be anything from 2% to 10%.
Some franchises are structured a little differently, with flat monthly or quarterly fees in lieu of a percentage royalty.
The 3 Best Franchise Finance Options
1. Business Loans
The main source of franchise finance is a business loan. Like many startup loans, a business loan designed for obtaining a franchise is going to depend on multiple factors:
Your Company Structure
Are you looking to become a franchisee as a sole trader or under the umbrella of a limited company? Are you to be the sole director or are others entering in partnership?
It is also worth understanding that even if you choose to become a franchise as a limited company, lenders are likely to request a director’s personal guarantee, meaning you could be personally liable for any loan repayments. See related: Personal Guarantee Insurance
Of course, not all franchises are undertaken by a newly formed limited company or sole trader without experience. You may be an established business looking to expand, able to leverage a larger level of financing thanks to a history of stability.
Your Business Plan
Your business plan is essential when securing franchise financing. For many franchises, it is also important to be considered for the franchise itself.
For these reasons, you should consider your business plan an extremely important document that is worth the many hours of scrutiny and revision that is needed to make it completely professional.
Your business plan should clearly show how your experience mitigates the risk for any lender, alongside a comprehensive forecast detailing your expected profitability and the business viability.
Your Credit History
Both your personal credit history and your business credit rating are going to come under scrutiny when applying for franchise finance.
It is worth spending the months prior to your application working on clearing any outstanding problems with your credit rating and ensuring that your score is in good health.
Debt Service Coverage Ratio
A factor that many lenders will consider either alongside, or in place of your credit score, is that of DSCR, or debt service coverage ratio. DSCR is an indicator of your business financial stresses and can be used by lenders to understand whether you can afford the repayments on any loan.
Loan to Value
Franchise finance is never 100% loan to value (LTV), which means alone it will not cover the entire cost of buying the franchise and providing the liquid capital needed for other expenses.
Most franchise finance business loans in the UK are limited to cover 70% of the startup costs - the rest will need to be found from other sources.
Assets as Collateral
If your business has assets to use as collateral, your franchise finance business loan can take the form as an asset-based loan, with the advantages of higher potential loan value and lower rates of interest.
Assets may include those being purchased for the business, with high-value equipment and property particularly effective for use as loan guarantees.
2. Asset Finance
Asset finance is a range of products designed to obtain equipment, furniture, or other assets through both short- and long-term leasing and option-to-purchase arrangements.
Asset finance is flexible, allowing you to obtain equipment and machinery in a way that suits your goals, whether you want to take full ownership of the equipment and pay it off with a hire purchase arrangement, or undertake an operating lease agreement where equipment ownership and all responsibilities for maintenance remain with the leasing company.
3. Line of Credit Facilities
Line of credit facilities help with the ongoing day-to-day running of the business, especially during the early days or through quiet periods in seasonal businesses.
Lines of credit are arrangements where credit is provided on an as-you-need-it basis, with interest paid only on the credit used rather than a full loan amount. Familiar lines of credit typically used for franchises include business account overdraft facilities and company credit cards.
It is important that lines of credit are properly managed as it is easy to become dependent on them incurring spiralling long-term costs, but they provide an essential component in a business's toolkit and are particularly effective for developing franchises.
How Do I Get Franchise Finance?
While some franchises will help you with your financing, directing you to lenders with whom they have established relationships, many franchisees look to source their own financing to obtain the best rates and other benefits.
At Clifton Private Finance, we have a team of experts in franchise finance here to help you get the business loans, asset finance, and lines of credit that you need to propel your franchise to success.
As a business finance broker, we have all the experience needed to get the best deals, saving you time and money. Contact us to speak to a franchise specialist today.
What Alternatives Are There to Franchise Finance?
Borrowing is not the only way to support a franchise. Other methods to obtain the capital you need include:
- Grants - Government, charities, and third-party institutions have a number of grants available to support business growth in the UK, such as innovation grants. As franchises contribute a substantial part of the country’s business growth, support does exist for entrepreneurs looking to fund a franchise.
- Venture Capital - Investment from outside sources, such as venture capitalists, is a viable way to raise the capital needed to obtain a franchise. Investing in franchises is a growing trend for equity investors, offering franchisees a potential avenue for both capital and a wide network of experience.
- Family and Friends - Seeking investment from family and friends can be extremely worthwhile for franchisees, as the lower-risk that’s involved in a franchise business can mitigate the worries for personal investors looking to help their loved ones.
Franchise Finance with Clifton PF
We’re here to help you turn your franchise dreams into reality. With experts across the full spread of business finance options, our team have the knowledge you need to get the franchise finance you’re after.
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