On the road to owning your own franchise, one of the biggest looming obstacles to making it happen is finance. If you think it will be easier than financing a start-up simply because it’s a franchise, you’re in for a surprise. So how do you drum up the dosh?
Once you’ve been approved by the franchisor, ask them for a list of preferred lenders and details of lender expectations. If the franchisor has been around for some time, chances are they’ve developed relationships with finance institutions.
While industry experience and ability to run a business play a large part in successful finance, lenders tend to loosen the purse strings more readily for an applicant who has gotten the green light from a reputable franchisor.
Some franchisors are also able to provide some of the finance themselves or through partnerships with lenders. Taste Holdings, for example, has partnered with Nedbank and Brimstone Investment to create a funding model that helps prospective Fish &Chip Co franchisees gain finance.
If you’re going to approach a bank for finance there are a few things you’ll need to consider before you do. Banks like hard numbers. As always, solid business plans with strong financials and a great credit history are a must.
Industry experience or a related history is a big plus, but perhaps most importantly, the lender is going to be focused on how strong the organisation is and what kind of support it can give its franchisees.
If the franchisor hasn’t been in business for long, be prepared to sell the lenders on it with strong numbers.
Provide a detailed explanation of how you plan to save money on equipment and supply arrangements, your research on buying versus leasing, your plan for hiring and managing employees, for finding real estate and so on. It will show the lender you’re thinking about this.
Tapping retirement funds
Some consider it risky to tap retirement assets for a new business venture, but others see it as a natural fit. The question you need to ask is whether you’re willing to take the risk and build equity in something you’re managing rather than leaving it up to others.
If you choose to go that route, it has the advantage of not having any debt to repay. As for the risks, it may not be that different from the risks associated with loans that call for personal assets as collateral, provided you’re young enough to shake it off and get saving again.
If you’re reaching retirement though, assess your decision carefully. With enough careful planning and due diligence, you can mitigate the dangers, but any business venture is a risk.
Cracking the nest egg
Even if you take out a loan, you can still use your personal savings as a down payment or a nice cushion until the profits get rolling.
Bear in mind that most franchises require a minimum 50% unencumbered capital, so the more money you have saved up, the more can go toward working capital or emergency funds.
The other F-word
We’re talking about friends, family and fools. But just because you’re on familiar terms doesn’t mean you can skip the important business plan process, expect to borrow money with no financial reward for the lenders, or run the risk of ruining relationships if your venture flops.
Remember also: Franchises require high unencumbered capital to avoid high gearing. In the event that your lender needs their money back sooner than expected, will you and your franchise be able to survive?