Franchising can offer some unique benefits but, as with any new venture, prospective franchisees will face one big question before they can dive in: how do I pay for it?
To get access to the benefits of the franchise business model, new franchisees will often require external funding, ensuring they have the capital to cover start-up costs, franchise fees and ongoing costs. Here’s what you need to know to secure funding for a franchise and get up and running.
Can You Get Financing For a Franchise?
Often, getting financial help for a franchise is easier than it would be with a start-up. Banks and other financial institutions are typically more inclined to provide the funds for a franchise business over a new independent venture because they have a much higher success rate.
Franchises are generally a better business bet for lenders, making it simpler for the right applicant to secure funding for such a business that is more likely to be profitable from the very start.
Types of Franchise Funding
There are a few paths to take when deciding how to fund a franchise.
Traditional Bank Loans
The most common way to finance a franchise is with a bank loan. Many major UK banks will offer dedicated franchise loans for established franchises. This is an especially good option for franchisees who require substantial funds to cover startup costs, initial fees and equipment.
You can typically borrow up to 70% of your total franchise investment, meaning you will have to fund the remaining 30% through personal savings.
Government-Backed Start-Up Loans
An alternative option is to use government-backed schemes, which can be used for franchises, provided you meet the eligibility criteria. You can borrow up to £25,000 with a fixed interest rate of 6% with the government start-up loan scheme. This option will mainly be available for smaller, newer franchises.
Asset Finance
This can be used to fund physical assets, which can then be used as collateral. It is helpful for franchisees who need to spread the cost of expensive equipment over more manageable monthly payments.
Working Capital Loans
Shorter term loans like working capital loans are ideal for covering day-to-day costs or managing gaps in cash flow. This can be especially useful for seasonal businesses that may see fluctuations throughout the year.
Family & Friend Investment
Getting help from family and friends is an informal system, but it is often used to make up at least part of the funding for new business ventures. This can take the form of a simple loan or something like a joint partnership agreement.
Franchisor Financing
In some rare cases, franchisors themselves may also offer financing help, although this will be very dependent on the specific franchisor, industry and franchisee qualifications. Aside from actual internal franchising options, some franchisors may also offer deferred or reduced fees in some scenarios.
How to Get Funding For a Franchise
No matter how you want to finance your franchise, there are a few key things to consider to ensure you are able to secure the funds you need and the process is as smooth as possible.
Understand the Costs
Before shopping around for the right loan, you need to understand exactly what costs are involved in your chosen franchise. Research the cost breakdowns of the franchise to understand how funds will be allocated and how much you need to borrow to cover startup costs, which may include things like the premise lease, furniture, store design, equipment, stock, staff training and wages and promotional materials.
The franchise fee and any other advanced fees will also account for a large part of the overall cost.
Create a Strong Franchise Business Plan
A well-prepared franchise business plan is essential when applying for funding. Lenders want to see that you understand the franchise model, the local market and the financial expectations.
Including accurate start-up costs, projected revenue, personal qualifications, finances and information supplied by the franchisor helps demonstrate that your plan is realistic and carefully thought through, making it more likely that you’ll receive the funding you’re asking for.
Prepare Financial Documents
In extension of this, you will also want to organise your financial documents to ensure that everything is readily available and that you can prove you’re a good candidate for a loan.
Bank statements, evidence of savings, details of income and a breakdown of your assets and liabilities all help lenders assess your application. Providing these promptly makes the process smoother and more efficient.
Choose a Lender with Franchise Experience
Many UK banks have dedicated franchise lending teams who understand how franchising works. These lenders are often more open to funding franchise ventures and can offer better terms for proven brands. Getting pre-approved by a specialist lender can strengthen your position and give you clarity on your budget.
Choose a Reputable Franchise
Similarly, joining an established and proven franchise brand can significantly improve your chances of securing funding. Lenders feel more confident supporting businesses with a strong track record, clear systems and existing successful stores. This often leads to quicker approvals and more favourable terms.
Make the Most of Franchisor Support
The best franchisors offer extensive support systems and will be able to provide guidance when it comes to accessing funding. Make the most of this support and lean on franchise experts who may be able to help you negotiate better terms. Some franchisors may even offer incentives and fee reductions for some franchisees.
Financing a franchise may seem daunting at first, but with the right preparation and support, aspiring franchisees can turn their dream of running a successful business into a reality!
If you’re seeking franchise investment opportunities, a coffee franchise could be your perfect next venture. To find out more about the coffee shop industry and what we do, take a look at the Esquires brand brochure.
