Guide to franchise finance [2022]

Jacob Overs

Thursday, 26 March 2020

Taking on a franchise can be an exciting and rewarding experience, but equally daunting if you’re new to the opportunity. We’ve summarised everything you need to know about financing a franchise so that you can figure out if it’s for you.

Whether you’re stuck on where to begin or simply want to understand your options, let’s dive in.

What’s the difference between a business and a franchise?

A franchise is an established business with multiple stores or locations. Typically, a different business owner will operate each store independently.

Technically speaking, a franchise can be defined as a contractual relationship between a franchisor (brand/product owner) and franchisee (dealer/store owner). The franchisor will guide the franchisee, assisting with things like marketing, training staff, organising and managing their daily operations, in exchange for a franchise fee.

For example, a chain of fast food restaurants like McDonalds is considered a franchise, where each store is owned and operated by a different person, but the products, branding and operations largely remain the same across stores.

On the other hand, an independent business is owned and operated by one person or entity.

Is a franchise for you?

If you’ve always dreamed of running your own business, opening up a franchise could be the perfect opportunity. Think about which industries interest you, what skills you have to offer, and what you’re most passionate about. Upon reflection, which franchises in your area align with your expertise and goals?

After deciding on a franchise that you feel passionate about, consider your financing options. To begin with, you’ll need cash to pay for franchise fees, but also consider working capital and inventory.

Once you have a rough idea of the costs involved (and are confident you’ll be able to make ends meet), calculate your net worth. This will help you get a better idea of how much funding you’ll need.

To calculate your net worth, list all the assets you own in a balance sheet (e.g. cars, equipment, properties, investments and savings) followed by your liabilities (e.g. mortgages, bills and other loans). The difference between these two figures is your net worth.

Lastly, get down to the nitty gritty by requesting a breakdown of the franchise costs. This will help you determine whether you’ll be able to afford the day-to-day running costs of owning your franchise, ultimately preparing you for success. Consider the following costs:

  • Initial investments, like franchise fees
  • Costs for store renovations or fit-outs
  • Commercial property costs
  • Staff wages
  • Ongoing maintenance and operating costs e.g. bills and store upkeep
  • Equipment hire

All costs considered? You’re ready to find finance. We can support you on this exciting phase of your journey by tailoring a finance solution for you, and ultimately getting your foot in the door. Chat to a business finance expert today.

What to look for in a franchise loan

Franchise finance is not all that different to other types of business finance, but there are a few options to consider.

Is flexibility important to you?

Some lenders have financing options that let you choose your loan term and repayment schedule. Do you want to make repayments weekly or monthly? If you have a preference, consider a lender that offers flexibility.

What can you afford?

Don’t stretch yourself too thin by borrowing more than you can afford to repay, and if you’re not sure what your return on investment (ROI) looks like, drop us a line and we’ll work with you to figure it out.

Do you have access to assets?

If you have assets (typically property) to offer upfront as security, your chance of approval increases, as does the amount you can borrow. Typically, those looking to finance a franchise will get 50-70% of their store’s total value.

How reputable is your franchise?

If your franchise is established and performing well, this increases your chances of getting approved for finance. It could even score you a better interest rate, as your lender knows there’s a high chance you’ll be successful and therefore able to repay your loan.

How much can you borrow for a franchise?

As mentioned, when financing a franchise, you can borrow up to 50-70% of an existing store’s business value, without collateral. If you have an appropriate asset to offer as collateral (typically a residential property), you may be able to borrow up to 100% of the store’s business value.

How to apply for franchise finance

Applying for franchise finance means you’ll have an easier time getting to ‘yes’ through a lender, rather than requesting funds for a completely new business. This is particularly true for well-known franchises (think McDonalds, 7-Eleven or Mad Mex) as they’ve proven enormous success over a number of years.

According to the Small Business Administration (SBA),

“...lenders prefer advancing cash to new franchises over other new businesses since they already have trust in the brand and business model of the business being funded.”

Note that lenders prefer franchises that have been around for a long time (the longer, the better), as they have had time to grow and develop into stable businesses.

But, regardless of how popular your franchise is, you’ll still be subject to the usual underwriting and finance application process. Your net worth and credit history will be assessed, and you may be required to provide security, especially if you’re seeking finance through a bank (as opposed to a non-bank lender).

To get franchise finance at a competitive rate, simply visit our free loan finder. We’ll compare quotes from lenders and negotiate on your behalf so you can get the best rate on finance. We’ll also do the paperwork and heavy lifting, while coordinating between you and your lender, so you can get on with planning for your business. Get business funding in as little as 24 hours.

If you’re looking at finance for an existing store, you’ll need to provide your bank with financials from the past 2-3 years, including profit and loss statements, business tax returns and business bank statements.

If you’re a new store, you won’t have this information handy, and your lender will therefore be more interested in your business plan and personal experience. How will you inject resources into the store? Have you had any experience in your chosen industry? Your lender will ask questions like these to see if you have what it takes to run a profitable business.

More broadly, banks will look at the following factors to determine your eligibility for franchise finance:

  • Number of stores: Typically, banks prefer lending to franchises that have 30 or 40+ stores. If there are plans to grow this figure, that’s even better. Without a large number of stores, you may have trouble securing finance or require collateral to back your loan, reducing your perceived risk as a borrower.
  • Type of industry: It’s risky for lenders to put all their eggs in one basket, which is why they like to lend to a range of different businesses in different industries. That means spreading their services out to franchises in hospitality, retail, health, finance, etc. rather than sticking to one industry only.
  • Reputation: Banks and lenders also avoid risk by offering finance to reputable businesses who are performing well and free from controversy (e.g. they will avoid lending to companies or industries who are known to treat their staff badly, as this in turn, makes your lender look bad).

Your franchise finance options

Franchise business loans include traditional loans offered by banks as well as alternative finance solutions from online lenders.

Franchise finance is similar to any other type of business finance, with a few key differences. The loan term is tied to the length of the franchise agreement term, which is an agreement between you (the franchisee) and your franchisor on how you’ll run the franchise.

Because of this, loan terms are generally shorter in length. Without collateral, the loan term is typically between 5-10 years, and with collateral, that increases to 25-30 years.

One last tip

Taking on a new franchise (while deeply rewarding) comes with a range of challenges, but dealing with tedious finance applications shouldn't be one of them. Call us on 1300 780 568 for a hand with your finance application, and one less thing to worry about!

We’ll handle the paperwork, negotiating and coordinating (in as little as 24 hours), so that you can focus on planning your roadmap. From all of us here at Valiant, we wish you the best of luck on your business journey.

Jacob is the Director of Sales here at Valiant. He has a wealth of experience in helping small business owners with their everyday finance needs, and is our go-to guru for all things working capital.

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