THE MONEY FEATURE
What can you do to help new franchisees obtain funding?
the raising of funds. Even if the franchisee has enough available money for the initial investment, they will need working capital to survive on before the business gets going. Lenders recognise that franchising is usually less risky than setting up a business from scratch, and are therefore generally happy to provide a loan to franchisees, particularly those investing in an established brand with a proven track record. Here, leading fi nance providers and industry experts detail the various methods of gaining fi nance and explain how you, as franchisor, can help your recruits through the application process to fi nd the money they need to become a successful part of your franchise network.
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must be from the franchisor’s point of view if, having spent weeks trying to get a person ‘signed up’, the deal falls through because the banks decline to assist. It is even worse if a franchisee fails in the early stages because they were simply undercapitalised at the outset.
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fter the initial suitability assessments have taken place and an agreement has been reached, a fi nal – but vital – aspect of the recruitment process is
The damage to the brand and the view of the banks to your franchise could be severely damaged, particularly if this were to happen several times. There are ways of ensuring this does not happen to you and your franchise network. This segment details the steps that we, Franchise Finance, take when acting on behalf of our franchisor clients and contains some of the advice we provide to franchisors, both new and existing, when we run the Finance Clinic at The Franchise Exhibitions. The fi rst thing is to ensure an early personal fi nancial assessment is conducted pretty much right at the beginning of the process. Key reasons for banks saying no relate to the borrowers not having the legal rights to work in the UK, a poor credit history or not having a suffi ciently high contribution from their own resources (banks expect to see a 30 per cent contribution for more established and proven franchises and 50 per cent for newer franchises).
The total funding on which these lot hinges on the prospective
franchisee’s ability to raise the correct amount of money; how frustrating it
percentages is based includes the franchise licence, other start-up costs such as equipment, stock, vehicles and property refurbishment, plus vat, fees and working capital. If the total borrowing requirement is likely to be more than, say, £25,000 then it is likely that some sort of security will be required. If the prospective franchisee does not have any then they may be eligible for the government’s ‘Enterprise Finance Guarantee Scheme’. Coming back to working capital, this is the area where we see most mistakes being made. This element is often missed or underestimated. The key point here is that even if the franchisor projects a profi t by the end of the year, it will often be made in the latter part of the year as the business becomes more established, gets more customers and the franchisee becomes more confi dent and experienced. It is very likely that in the early stages of the fi rst year the business will have higher costs than income so it will initially be loss making. These losses need to be covered by available cash; the only way to work out how much is likely to be required is to complete a full comprehensive set of projections.
This is a key part of the service provided by Franchise Finance and forms the backbone of the business plan that we complete for all our clients. We understand the pitfalls and common mistakes that people make and, as
a dedicated franchise team able to provide fi nance for the purchase of a franchise. Franchisees would probably expect their chosen franchisor to assist in the raising of fi nance – after all it’s just another process within the franchise system. There can, however, be dangers in helping franchisees, such as fi nancial misrepresentation – the numbers you supply need to be backed up by proof.
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To help franchisees obtain their fi nance and speed up the process franchisors can undertake a number of actions:
• Ensure that the banks have the latest information on your franchise – when did you last supply them with a copy of your prospectus and franchise agreement? These will have the latest costs associated with the business, which may have changed since your last review with the bank. If the fi gures differ it can delay the process while they
well as completing plans ourselves for clients, we also run a series of workshops and courses to help franchisees to compile their own plans and also to help franchisors understand and review plans and the subsequent fi nancial (and non–fi nancial) performance of their franchisees. So, some careful ‘screening’ allied to detailed
professional planning will ensure time and money is not wasted during the recruitment process and hopefully lead to a successful outcome for all concerned.
aising fi nance for a franchise is not as daunting as it may seem. NatWest and some of the other banks have
Mark Scott, director of franchise development, NatWest
Franchisor News | 25
Chris Roberts, director, Franchise Finance
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