For those considering a career change, franchising offers one the most stable routes into business for anyone moving to self-employment. However, savings or a redundancy package may not completely cover the funding required to invest in a franchise. Since the Pandemic, banks are no longer able to provide finance on Enterprise Finance Guarantee (EFG). This is a government backed lending scheme which is currently on hold pending review, designed to help small businesses attain start-up capital where a prospective business owner doesn’t have a property to secure against the lending. As a result, funding options are more limited and so it’s necessary to get professional, independent advice. So, what options are available?
Normally, a bank will have funding deals available to suitable candidates on a 70/30 split depending on individual circumstances and the reputation of the relevant franchise brand. This means for a £100K investment to include the franchise purchase fee, solicitor’s costs, any assets or equipment required plus working capital, the bank will usually lend 70% or in this example £70K. It’s a simple, clean type of deal with just one lender.
However, for those who don’t have enough of their own capital to cover the outstanding 30% themselves there are other possibilities. For example: start-up loans can offer £25K per director of a limited company. By adding a spouse or partner as a director too, it is possible to source a further £25K from the Government. It is then possible to add this lending to a bank loan to fund the full purchase price of the franchise with say a 25/25/50% split.
Asset finance is also an option to add to the mix. Any equipment, machines or vehicles needed can be classed separately. So new franchisees could end up with a start-up loan, some cash of their own, a percentage from the bank plus asset finance.
The challenge is that anyone starting a new venture needs to be careful to avoid too heavily gearing the business to the detriment of its long-term growth. Here’s where professional advice on the best way to raise finance plus how much is required and is realistic is important. It must dovetail with proper business planning to tie in to where the break-even point will come, as well as aligning with franchisor’s forecasts too.
Here is a word of caution. Sales projections included in franchise marketing collateral may well relate to the pre-COVID world and so banks will take this into consideration. Quite rightly, banks are being more cautious about lending at the moment. Some are not lending to start-ups at all, so as not to increase their risk portfolio in the current climate.
Therefore, it’s even more important for both franchisees applying for funding and franchisors looking to take on new franchisees, that everyone is clear if funding can be achieved early on in the process. A concrete, realistic business plan is required either proving the franchise has not been affected by the Pandemic or that if it has, how it has adapted successfully. Candidates also need to be squeaky clean; if their credit score is not good enough, then they won’t be able to gain funding. Therefore, franchisors need to do their due diligence on applicants too.
d&t’s Franchise Funding is a fully independent funding service, connecting franchisees to much needed finance to start or grow their business. In the past few months, our asset finance manager Phil Archer, has written business plans and supported funding applications for around £2million of franchise investment. The good news is that the industry is still moving forwards, deals are still being done and applications from good candidates, with well researched business plans, are still getting the funding they need to finance their new careers in franchising.