Business Finance for franchises

Franchising can be a way of starting your own business whilst limiting the risks.

One reason you may be looking at business finance is if you are considering buying or setting up a franchise. Some of the most successful businesses worldwide operate on a franchise basis, but is it for you?

In simple terms, franchising is a means of running a commercial operation using some or all aspects of another business, including its products and most importantly its name and brand. The business finance you will need to obtain will vary depending on the size and nature of the franchise.

The parent company, known as the franchisor, grants a licence to the franchisee for a specific time period. In return, the franchisee gets the benefit of the brand, often a well-recognised product that has a well-established reputation.

What level of business finance should I be looking at?

All franchises are different. Normally, the franchisor charges an upfront fee together with other ongoing costs, payable on a regular basis. The franchisor will normally have an obligation to support your business, provide some marketing and advertising, help with training and administration, and provide bulk buying discounts. This support runs for the length of the franchise agreement. The amount of business finance you need will be driven by a number of things including the level of the upfront fee that the franchisor charges and also the amount of ongoing working capital that you think you will need.

Business finance isn't just about the start-up costs.

If you are about to start a new business venture through franchising, you will have high expectations of success and will be prepared to work hard to achieve it. You may think you have raised sufficient set-up capital, but your expectations by way of earnings are as important to think about as the amount you will have to invest. Your business finance projection should include a realistic target in terms of income and expenditure, and it is possible that the franchise that appeals most strongly to your interests may not produce a sufficient level of income. Although the failure rate in franchising is low, failures are still possible if you try to take too much money out of the business too quickly.

Beware of the sharks

You need to be careful with any new business venture and taking on a franchise is no different. You must ensure that the franchise you are considering is legitimate and can deliver what it promises. There is an organisation known as the British Franchise Association and their members have to meet certain criteria such as:

Being prepared to disclose to you their financial records, details of their directors, the basis for the financial projections they make on your particular franchise proposition, and to identify their existing franchisees.
Operate with a franchise agreement which is comprehensive, protecting your rights as well as theirs.
Have proven that their product or service can be sold profitably in the market place.
Be able to prove that they can deliver the "know-how" of their business to a new franchisee, so that the new franchisee can be successful in the market place.

What will lenders offer?

Many of the UK's major lenders have a department dealing specifically with raising business finance for franchises. Indeed, often the banks have very good relations with franchisors, know their business model intimately and as a result are able to offer some very good deals to new franchisees.

For more information about finding the right business finance for your franchise, you can apply online at www.diyfunding.co.uk.

Keith Park