smallbusiness.co.uk: Helping your business think big

Your financial situation will play a huge part in determining the franchise business you can afford to run. The costs associated with franchising come in two parts: initial costs such as a fee payable to the franchisor for acquiring the rights to operate under the brand name, and ongoing costs associated with the day to day running of the business. You will therefore need to secure both fixed capital from day one and a certain amount of working capital to cover operating costs when there is little money coming in during the initial stages of operation. You might also need funds for ongoing management fees to be paid to the franchisor.

Raising money to finance the purchase of a franchise is treated in the same way as raising money to start any new business. All the major banks have specialist franchise units and, on the whole, they appear to look more favourably upon the average franchise application than on the average start-up. This is because the success rate with a franchise business is reportedly much higher and is therefore believed to offer a lower risk to a lender.

However, any bank will require that a prospective franchisee contributes a proportion of the start-up capital, around 40 per cent. The remaining 60 per cent could be financed by the bank, even up to 70 per cent depending on your circumstances. Of course, don’t forget that the lower the level of your borrowing the greater the chance of your business surviving.

A loan will need to be repaid by the end of the franchise term; however, there may be some leeway on the initial repayments of capital. For example, a repayment holiday could be arranged until the business is in profit.

If the bank requires security this could be provided by a charge on the business assets, such as premises or equipment, but only if you run the franchise as a limited company. If you remain a sole trader, a mortgage on your house may be acceptable.

There are currently no comments on this article