Given that you are buying into a proven system for business success when you buy a franchise, it is hardly surprising that you have to make a fairly substantial investment.
But the good news is that because franchising is recognised as a safer route into business than simply setting up on your own, many banks are happy to lend you a substantial percentage of the initial investment provided you have been accepted by a reputable franchisor.
The typical arrangement is that you have to find one-third of the total start-up funds yourself – many people use savings or redundancy payments – and the bank will lend you the other two-thirds as a business loan. Franchise funding is very competitive, however, and in some cases they will only lend half.
Most of the high street banks have special sections that deal with franchising which is a useful source of free advice. They provide information packs about franchising and financing and can help if you want to borrow money. Bank staff know about franchising, who the reputable and successful franchisors are and what level of risk they are taking.
So it may be worth talking to them before you even sign up for a franchise – banks often have stands at franchise exhibitions so you can compare what they have to offer.
Many franchisors have ongoing relationships with several banks that will look favourably on franchisees approved by the franchisor. So your franchisor may well suggest you talk to a particular bank or banks – though there is never a guarantee that you will be lent money.
When you apply for your business loan, franchise business plans are a must have. In most cases, you can count on your franchisor to help you draw this up, as it has done many time before. Some are frightened by this stage, but drafting a sound business plan is not a formality. Not only is it crucial to the long-term success of your business, but your franchise business loan broker will be looking to see that you fully understand the plan yourself rather than just repeating it parrot-fashion.
Also remember that you do not have to use your usual bank to obtain a business loan. Franchise businesses can pay to shop around to find a bank that understands your particular franchise well and where you get on well with the franchise business loan brokers.
Banks with special franchise financing sections include NatWest, Royal Bank of Scotland, Lloyds TSB, and HSBC.
Finally, just because you can raise money by borrowing does not mean that you should. The bigger your franchise loan, the more money your business has to make to meet the monthly repayments. If you have one or two bad months you could be under pressure.
And don't forget that if the franchise is set to become your major source of income it will have to generate enough profit not only to pay its own bills but your household expenses too.