Financing a Franchise
Are you a new franchisee and want to know how to pay for your venture? Mark Scott, Director of Franchise Development at NatWest, speaks to Franchise Direct and answers some of the most common questions when it comes to financing a franchise.
A Proven System
Looking at it from the bank’s point of view, financing a franchise mitigates risk, because as a franchisee you are working with a proven system. "The bank would lend to a franchisee because they will be looking to invest in a proven concept that has been replicated in a number of other locations, thus reducing the risk of failure for the bank and the franchisee," says Mark. "This can make it easier to get a loan for a franchise as opposed to getting financing for an independent business."
This means that now, you are the bank's main concern. As Mark explains: "The only variable is the franchisee. Therefore we look closely at their experience and financial history."
The Financial Options
So how do you get started? Mark says that there are a several options including fixed rate loans, variable rate loans, overdrafts, business cards, asset finance and invoice finance.
Bring Your Business Plan
"When you go for a consultation with the bank you should bring a business plan, which details the business being purchased but also the projections. This helps the bank make an assessment."
Mark says that the business plan is an important aspect because the bank needs to check "if the net profit allows the franchisee to pay for their personal expenditure, such as a mortgage, in addition to any finance taken out to start the business. Many franchisees look at the funding they need and work back towards a turnover figure which can be too optimistic."
During the consultation the bank looks closely at the applicant's experience and financial history. Once you are approved there is additional documentation that needs to be completed.
Mark urges potential franchisees to talk to their bank as early as possible so they know if they can get the financing that they require. As a franchisee you need to find out how much the bank can lend early on to assess whether you have a contribution sufficient for starting up your chosen franchise. NatWest generally lend up to 70% of the costs, but for a new franchisee it could be 50% or less. There is no limit to the amount that can be lent to the franchisee.
What Do You Need to Secure a Bank Loan?
If your loan is below £25,000 then you will generally not need security. If the loan is greater than that amount then the bank will "take a charge over any assets the franchisee owns, such as property that has sufficient equity in it." The bank will always take 70% of the value of a property before subtracting the mortgage.
If you are in a situation where you have insufficient equity the bank can look at the Enterprise Finance Guarantee. This is a government-backed loan which guarantees 75% of the amount that is lent to the franchisee. "The bank then considers whether the 25% element represents a fair balance of risk," says Mark. This can only be used when your other assets have been assessed as having no value to the bank or are not available.
Repaying the Loans
Repayment conditions are determined by the finance type. For example, a loan or asset finance is taken out typically over a three or a 10 year term. An overdraft facility will be reviewed annually to determine what is required for the next 12 months.
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