Looking into financing a potential franchise is a time-consuming process and rightfully so. Knowing exactly what finance or loan agreements you’re signing up for and what they include is vital. However, this doesn’t need to be complicated. You may have already decided that this is the right move for you and want to explore your financing options. Great! However, you could be feeling a little apprehensive about funding a potential franchise. Not to worry, there’s a range of ways you could potentially fund your venture and we’re here to help you decide which is best for you.
How much does a franchise cost?
As with any investment, in order to start the process of purchasing a franchise, you need to know exactly how much you need to get started. So, how much could franchising cost?
The British Franchise Association (BFA) suggest that the average cost of establishing a franchise is £42,200.
Franchise pricing is dependent on a variety of factors:
The type of company and industry you’re hoping to invest in
The location and size of the business – highly successful enterprises such as McDonalds will have a higher franchise cost than that of other smaller companies
If you’ll require a premises, such as an office to operate from (4 in 10 franchised businesses can be ran from home which can help to lower some of the costs).
Every franchise is different, however there are some standard costs associated with most – they include:
Franchise or “package” fee – The upfront fee you pay when you first purchase the franchise. Training for you and your staff, rights to branding and specialist equipment are included in your franchise fee.
Set-up costs – The fees needed to fit out the franchise in accordance with the business you’ve invested in. For example, van hire, renting, refurbishing and preparing retail premises etc.
Working capital – To keep the business up and running until you start to produce an income. Includes funds to cover supplies and expenses.
Insurance – if it hasn’t been provided by the franchisor.
Management Service fee – Pays towards the continuing services to the franchisee from the franchisor. These services include developing the franchise, keeping track of the performance of the franchisee, organising meetings and on-going research to name a few.
So, you may be reading this thinking that franchising is right for you but you don’t have sufficient funds to hand. You could also be full of apprehension as to how to go about borrowing such a large sum of money. So, what funding is available to you?
Ways to fund your franchise
Most franchises have a proven business format. This means that the majority of lenders are more likely to look upon an application for franchising financial assistance more favourably than a start-up business.
Franchise Department Loans
Most banks now have a Franchise department to aid potential franchisees in funding their investment (the leading banks in franchising include HSBC, Lloyds TSB and Natwest/RBS).
However, they only lend 50-70% of the total amount that you’ll require. You will need to provide the other 30-50% yourself but not in the form of a loan from somewhere else. Additionally, you’ll need to have a positive credit score rating in order to receive the loan.
Banks can also provide HMRC approved pension led funding schemes that allow users to invest a proportion of this fund into their new business.
Start-up loans scheme
This government-run initiative is particularly useful when it comes to funding a franchise as you’re investing into a well-established company with a tried and tested business plan. It offers loans of up to £25,000 at a rate of 6% APR over a period of up to 5 years, providing up to 100% of the investment amount.
HSBC Franchise SME Fund
HSBC will be offering funding of up to 70% of start-up costs to franchisees joining an established network. This model will require training and support for franchisees; however, it’s more capital-efficient and lower-risk in comparison to other methods. For people looking to invest in a franchise, the model offers a more accessible way of starting a business, using a tried and tested concept! HSBC have a dedicated franchise team who will be providing specialist knowledge and support focusing entirely on the industry. A central helpdesk will be on hand to franchisees – this will offer advice and liaison with local banking managers. Find out more in this short video.
Your own funding
If you have your own savings that you wish to invest with, you’ll need to borrow less than the minimum amount needed: this will make it easier to pay off these loans.
For more personalised advice on funding, Business Doctors are partnered with Swoop – experts in business finance. Whilst Swoop do not directly provide funding, they can introduce you to a wide range of loans and lending options, equity investors and government grant agencies such as the ones listed above. Swoop’s unique technology can also match you with the most relevant solution and best funding combination for you.
If you’re reading this and are still undecided on whether franchising could be the right move for you, take a look at our Operating a franchise is certainly not for everyone – could it be for you? blog post for more information.