Finance options for franchisees

Many people choose franchising as their preferred way of setting up in business and it’s not hard to see why. With an established franchise you are investing in a tried and tested business model and a recognised brand name. You’ll have the comfort of knowing that the franchise can be successfully replicated and there will be other franchisees within the network giving a track record to judge. On top of this, many people are attracted by training and ongoing support that is on offer to franchisees – which helps them get established. For these reasons franchising is often considered as a less risky way of setting up in business.

Before you take the plunge, however, it is worth noting that not every franchise offers the same level of support. It is essential that you thoroughly research your chosen franchise and territory before making a commitment. Of course, trading performance of any business is also directly linked to the drive and commitment of the franchisee. Not everyone is cut out to run a franchise, so think things through carefully, get professional advice and explore your options.

Common sense will take you a long way in deciding whether the franchise you are considering is right for you. The British Franchise Association produces a Franchisee’s Guide, sponsored by Lloyds TSB, which provides valuable information for prospective franchisees. For further details about the guides and support available from the BFA visit their website www.thebfa.org

Once you have made your decision, the next step is a business plan. This is the one document you’ll need above all else in order to raise finance for the business, which means you’ll need to show that you will be able to repay any money you borrow and demonstrate that you understand the business opportunity. However it will also help you set your business goals and measure them. Banks can provide a business plan template for you to use.

A bank will generally expect a franchisee in a well established franchise to make a capital investment of at least 30 per cent of set up costs. For a less established franchise the capital stake needed may be higher. Typically security would be required to cover any loan or overdraft finance that the bank puts in place, but finance terms vary from bank to bank so it pays to shop around for the right deal.

There are various finance options available to franchisees. Loans are usually provided to purchase the business and its assets. Interest rates can be fixed or variable and capital repayment holidays can be arranged. Overdrafts provide flexible working capital support. Debtor and Asset Finance may also be options to consider.

Some banks offer free banking for start up businesses, which can be a real help at the start, but the offers do differ, so again it pays to do your research – and remember to think about what you’ll be paying after the free period ends. Banks will be able to provide you with a copy of their business charging tariffs so you can compare deals. Some of the common lending related costs include arrangement fees for loan and overdraft facilities, security charges and property valuation fees.

If you speak to several banks make sure that the person you meet understands franchising and the business opportunity you are looking to invest in. Banks with a specialist Franchise Unit, such as Lloyds TSB are the best place to start. It is also important to understand the level of support that you are going to receive from your relationship manager once you start trading.

Banks that offer a proactive service with regular business reviews and an option to speak directly with and meet your locally based relationship manager may be better than those that just operate a call centre banking service, where there is little understanding of your own business and the local market conditions.

Richard Holden
Head of Franchising
Lloyds TSB Bank plc
Tel: 07802 324018
E-Mail: richard.j.holden@lloydstsb.co.uk
Website: www.lloydstsb.com/franchising

Richard heads up the Lloyds TSB franchise team and is a regular contributor to trade publications and national press. He is on the panel of judges for the prestigious Franchise Marketing Awards and regularly speaks at franchise seminars and exhibitions. Lloyds TSB are affiliate members of the British Franchise Association and proud to support ethical franchising in the UK.