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Small Business Franchise Financing
The franchise financing decision is made easier as a result of the success of the franchisers business model, which will already be proven. From a banks perspective, this means that franchisees are generally a lower credit risk. One reputable organisation puts the figures as high as 90% of franchisees will still be running a profitable business after 5 years, compared with at least half of other kinds of new businesses that cease trading. The bank of the company granting the franchises will also be interested in supporting the financing applications of potential franchisees, because they have a vested interest in the success of the franchise business. The track record of the franchise industry, its successes, and low rate of failure mean that many banks will also consider lending more of the total required start up capital than for any other new business. A rough rule of thumb is that a bank will lend dollar for dollar, or whatever you put up they will match. However, with a successful franchise operators this has been known to go as high as 80%. Whilst there is a wide diversity of franchises available, they are all characterised by the need for an up front fee, ranging from thousands to hundreds of thousands, and an ongoing contribution to be paid from the receipts of the business, usually expressed as a percentage of sales, (but not always) ranging anywhere from 10% to 20%, with minimum amounts payable should the business not reach required level of turnover. Part of the proceeds of the regular ongoing payment will be pooled with all the other franchisees funds, and contribute towards marketing and advertising campaigns of the business. What I like to call “The Brand thing”. Many franchisors will also determine where you buy the raw materials or goods for resale from, and perhaps control the lease on any premises you need. Determining the level of these charges can be a way for the franchiser to make extra income from the franchisee, so look out for these types of clauses in any agreement. Consider the amount of money you will invest, getting referrals and visiting existing franchisees, talking to them about how they financed their franchise, and discussing issues like pricing, training and their experiences is well worthwhile. If you’re thinking about starting your own business, then buying a small business franchise is a route that will provide greater chances for success than maybe starting out on your own, but their will be compromises on the way that you can do things. For further reading, I recommend you check out the
British Franchise Association
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