Have you ever thought about starting a franchise but are daunted about how to fund a franchise?
At FranchisingWorks we recognise that the main barrier to accessing opportunities through franchising typically has been access finance to fund a franchise. Franchising does require an investment, and traditionally this has also meant having some of your own personal finance available in order to leverage the total amount needed to invest. However, the funding environment is currently strong, even if you don’t have your own capital to invest. Here are five means – among various – to fund a franchise business:
1. Franchise Bank Loans.
The banks naturally are the first port of call to fund a franchise. The leading banks in franchising include Natwest/RBS, Lloyds TSB and HSBC, each of which have specialist franchise departments that understand franchising and go their own testing on franchise businesses. They will lend up to 70% to franchise businesses that have been successfully vetted, and generally are collaborative and positive to those looking to invest in a franchise.
Negatives:
- They only lend 50-70% of the total amount that you need, so you still need to have the other 30-50% available (and it can’t be in the form of a loan from somewhere else).
- They approach credit scores in a fairly black and white manner, so if you’ve had credit issues then it may be a no-goer.
The Start-Up Loans scheme is a government-run initiative that provides loans to businesses of all types across the UK. It offers loans of up to £25,000 (although anything above £15,000 is quite tough to obtain) at a very competitive rate of around 6% APR over a period of up to 5 years. Different to the banks, it offers up to 100% of the investment amount, and applicants can apply for capital repayment holidays. It is a great way to fund a franchise if it is well-established and you have an excellent business plan and don’t need too much funding.
Negatives:
- Limit of £25,000, and difficult to access more than £15,000
- Some strict requirements regarding financial forecasts
- Would require the franchise to have a very strong trading record
3. FranchisingWorks Licence Funding Charter
In recognising that access to finance is the largest barrier in getting into franchising, the licence funding charter is a way by which a franchisor may agree to fund a portion of you start-up costs linked to the licence value of the franchise. It is available for people who aren’t in full-time permanent employment, and who need the finance in order to meet the start-up costs. It is only available against franchises that can be successfully vetted as being ethical, viable and established business models. Credit reports are considered qualitatively, so a perfect credit score isn’t always required.
Negatives:
- Only available against franchises that can be vetted
- Not available for people coming out of full-time, permanent employment
- Only to be used as funding of last resort
4. Local Community Development Finance Initiatives (CDFI’s)
If the above aren’t suitable for you, there are likely to be smaller business finance initiative running in your county or region that provide loans at higher loan to value ratios and that assess credit score in a qualitative manner. Often you may be looking at slightly higher interest rates of, say, 10-15%, and application processes can be more stringent, however they often offer loans upwards of the £50-100,000 mark. An example in Greater Manchester includes the Manchester Business Loans scheme.
Negatives:
- Typically have higher interest rates
- May have a lower risk profile than the Start-Up Loans Scheme
- Application process will be quite rigorous
The New Enterprise Allowance is only relevant for you if you are not currently in work and signing on benefits. If this is you, then be aware of this benefit, which allows you to sign off Job Seekers Allowance (and in some cases, Employment Support Allowance) and on to New Enterprise Allowance. This allows you to stop seeking a job but continue to receive benefits for 8 weeks whilst you get the business started, and then once started you continue to receive 26 weeks of benefit to support your living costs as you launch. It also allows you to apply for a loan at 6% APR for up to £2,500, however this may not make much of a dent in your finance requirements and most people opt to apply through the means above instead.
Negatives:
- Only people on JSA (and possibly ESA, and not for those on the Work Programme) are eligible
- 8-week window once you sign on in order to start up your business
- Only offer loans up to £2,500 so unlikely to be enough in itself to fund a franchise
If your serious about starting up a business through franchising and interested in learning more about how to fund a franchise then do get in touch with our team at FranchisingWorks who can provide specialist (and free) advice on the UK Franchise Industry supporting you in making the right decisions going forward.