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In this month's guest article, HSBC UK discuss everything you need to know about financing a franchise. Securing a loan from a financial institution is easier than you think!
Franchising is booming across the UK. It employs more than 620,000 people and contributes more than £15 billion to the UK economy. It is a sector of prosperity, with more than 97% of franchise businesses reporting profitability, according to industry figures.
There are some big advantages to starting a franchise, not least when it comes to finance. Having the benefit of a proven business format and projections which are usually based on reality means that lending requests are more likely to be looked on favourably.
So with the benefits clear to see, how would you take the first step into financing your own franchise?
The first focus should be on having a robust business plan. The value of a good business plan can’t be overstated and completing a thorough plan will not only be beneficial when you are applying for finance but it will help you to think methodically and sharpen ideas about your business.
Lenders will, of course, be interested in your financial information but will also want to see a strong strategy and management plan and insight on the day-to-day operations of the franchise.
When it comes to financial information it’s essential to include an up-to-date balance sheet, profit and loss and cash-flow statements. This may sound daunting but there will be lots of help and support available from your franchisor and established consultants. You should also highlight key figures, such as sales, operating costs and financial ratios, and explain any trends or anything unusual. We will also be looking to see at least two years of projected figures, ensuring they correspond with the information in the plan and making sure that they are realistic.
The more solid information that can be gathered and included, the better the business plan will be. When requesting finance, banks will look to assess the proposal using all of the areas covered above. A well-researched and written business plan will show potential lenders commitment and understanding of the business, meaning that a request for finance is likely to be looked at more favourably than those who are less prepared.
One key piece of advice to remember is don’t be afraid to talk to your bank. We can help to develop a financial package suitable for specific needs, using all the options available. You’ll be pleased to know that talking to a bank manager is nothing like being in the Dragon's Den! We won't tear shreds off you but we will be looking to have confidence in you as a business owner. Learn the key metrics of your business and come up with some contingency plans so you can be prepared if you are asked difficult questions about how your business will operate. By working together, we can help to ensure the business plan is put into action and develops and grows to its full potential.
Some of the commonly asked questions we receive from potential franchisees, include:
How much can I borrow?
For an established franchise with a good track record you may be able to borrow up to 70% of the start-up costs including working capital. For a newer franchise it is likely that you will have to put in at least 50% from your own funds. It is very important not to over-borrow but also crucial not to be under-funded.
What security will the bank require?
The need for security depends on the amount borrowed and how much stake is available, but it will normally be required. This is often going to be a charge over the domestic property although there may be business assets that could be taken as security. If there is insufficient conventional security it may be possible to take advantage of the government’s Enterprise Finance Guarantee scheme.
What rate of interest will I be charged?
Interest rates will vary based on the amount borrowed, how much stake is provided and what security is available. However, we see franchising as a less risky way of starting a business. It’s most likely that interest rates for a franchise owner of an established franchise would be lower than those for a standalone business.
Does it matter if my franchisor is not a member of the British Franchise Association?
HSBC UK is an affiliate member of the bfa. Membership of the bfa does not guarantee the success of your franchisor but does indicate that the franchise has been accredited by the Association and meets its ethical guidelines.
At HSBC UK we have a team of franchise specialists in place to support you along every step of the journey. Whether it’s building your plans for your first franchise or franchising your own brand around the world. We offer tailored finance packages to match whatever you might need.
We also know that the best business banking isn’t about money, it’s about creating strong, supportive relationships. To find out more about our franchising team and the specialist support they can provide, visit www.business.hsbc.uk/franchising.