Financing Your Franchise

What are the 5 Things You Need to Secure Finance?

  1. A potentially profitable business with high growth.
  2. A strong management with the experience and confidence to make it all happen.
  3. A fully researched business idea or product.
  4. An objective of how to reach profitability and how to repay any financing that is received.
  5. A well prepared and ‘not over the top’ business plan

Raising Finance for the Purchase
Any lending institution that is asked to fund the purchase of a franchise would need to have answers to the following questions:

  • Who would be running the business?
  • Would the owners have the necessary management experience or would that require further training?
  • Is the franchise a reputable one with a good name?
  • Is the franchise successful?
  • How good is the franchisor and what is the track record over the years?
  • How many other franchisees have operated successfully under the franchisor?
  • How does the cash flow stack up?
  • Would the cash flow provide sufficient to meet repayments on the loan?
  • Does the franchise have a specified system that has been proven successful?
  • Have you as the potential borrower, discussed fully all aspects of the franchise with your professional advisors who are experienced in this type of business format?

10 Steps for Successful Franchise Financing

  1. Have a business plan that is well conceived and constructed.
  2. Make sure that your credit history is clear and that anything on it that needs clarification is explained.
  3. Know how much you need and the purpose for the finance.
  4. Complete in full the Application form for the funding
  5. Show how you would raise the funds to repay the loan
  6. Idfentify any problems in your business and put in place strategies for correcting them.
  7. Make sure you have some funds of your own invested in the business .This “hurt money” is an important factor as far as a lender is concerned.
  8. Be realistic with your projections. Your figures need to appear credible or the lender would lose faith in you
  9. Prepare for the downside. Have an exit strategy in place so the lender cans se what you would do in the “worst case scenario”.
  10. Keep at it. Don’t give up if you are initially rejected. Go onto other potential lenders until you are able to arrange the finance that you need.

Ways of Raising Finance
There are 4 Different groups.

  1. Self Funding – The money is raised by you and your friends.
  2. Debt Funding - The money is borrowed from others.
  3. Equity Funding – It is raised by selling to others an interest in your business.
  4. Other Funding – gifts, grants etc.

These can be broken down again into 4 ways in which funds can be raised:

  1. Private and Family - Funds from private and family sources.
  2. Debt Financing - Borrowing money from others.
  3. Equity Financing - By sale of an interest in the business.
  4. Other Financing - Other sources such as Trusts, Grants etc.

1. Private and Family Finance

Private Savings
Here you would be looking at your own private savings and other family finance. In most cases the lender would want you to invest some of your own cash into the proposition if they are going to provide loan funds.

Friends and Relatives
Friends and relatives are an important source of funding because they know you and should be aware of the potential opportunity that you have. Keep things formal and make sure that everything is documented with a proper loan agreement.

Other Private Sources
Check out other sources such as your credit cards, cashing in your insurance policy, taking out a second mortgage on your home etc.