How to Finance a Franchise

Opening a franchise can be an exciting venture since it simplifies the business-building process.

Not only do you get to follow a proven business blueprint, but you also get ongoing support to help you succeed. But opening a franchise requires significant financial investment.

Luckily, lenders see franchising as a safer business route due to the extra support involved so they’re more likely to approve your application.

But it’s also important to prepare yourself for the lending process by having good credit along with a detailed business plan.

In this guide, we’ll explore the key aspects of financing for your franchise such as:

• Understanding the costs involved in franchising.
• Creating a franchise business plan that can secure financing.
• How to finance a franchise purchase.
• What to expect when you meet with a lender.

Let’s dive in.

Understand your franchise costs

Before approaching lenders, it’s essential to understand the costs associated with your franchise.

While franchise costs vary depending on the industry, brand and location, there are common costs that you’ll likely have to pay.

These may include:

• Franchise fees: This is the initial fee that gives you the right to operate the franchise. Think of it as paying for their business blueprint.
• Rent: Most franchisees will rent their premises instead of buying. Some franchisors will organise the lease for you, but you may have to do it all yourself.
• Equipment: Many franchisors will bake this cost into the initial franchise fee, especially if they have deals with manufacturers.
• Inventory: In the beginning, the franchisor may stipulate how much initial inventory you require but then ongoing purchases will likely be up to you.
• Marketing: Many franchisors take care of marketing and advertising since they can do it for all their franchisees at the same time. You’ll likely see a fee for this in your itemised franchise costs.
• Working capital requirements: While not a fee, you need to set some money aside to cover salaries, inventory needs and other business costs.

Most reputable franchisors will already know all the costs associated with opening one of their franchises. So, it’s a good idea to ask them for an estimation of the franchise costs.

Create a detailed franchise business plan

A well-structured business plan is vital when applying for franchise finance.

It not only showcases your understanding of the business model but also demonstrates your commitment and professionalism to potential lenders.

These are some sections your business plan should include:

• Executive summary: This is a concise overview of your entire business plan. It should highlight the key aspects of other sections in your plan such as your unique selling proposition.
• Market and competitor analysis: A thorough market analysis helps you identify and understand your target market, industry trends, and potential opportunities. It should include information on market size, growth rates, demographics, and consumer preferences. You should also conduct a competitive analysis to assess your competitors’ strengths and weaknesses and share how your franchise differentiates itself.
• Marketing and sales strategies: Describe the marketing channels you’ll use, such as a website, social media, local outreach, etc. Share who your target audience is and how you’ll attract them.
• Financial projections: Project your revenue, expenses, and profitability over the next three to five years. Consider factors such as franchise fees, royalty payments, operating costs and anticipated sales growth. But keep in mind that your projections should be supported by market research and industry benchmarks.
• Start-up costs and financing needs: Provide a breakdown of your expected startup costs and explain how you plan to finance your franchise. Common startup costs include franchise fees, rent, equipment, etc.
• Contingency plans: Running a franchise has its challenges so you must address potential risks and challenges that could affect your success. You should identify how you plan to mitigate these risks if they arise.

Some lenders may require additional information in your business plan so it’s a good idea to simply ask them before scheduling a meeting.

The good news is that your franchisor will be able to provide all the necessary information (regardless of how stringent your lender is) since they’ve gone through this process several times.

Choose an appropriate franchise lender

Once you have a solid business plan, it's time to explore your finance options and select the most suitable lender.

But what sources of finance are available to a franchise?

Traditional loans from franchise finance lenders such as banks, credit unions, or other private institutions are a common choice for franchise buyers. Popular lending institutions in the UK include Swoop and ASC Finance (this lender only provides finance for larger franchises).

To help you decide which lender suits you, you should compare different lenders based on factors like interest rates, repayment terms and collateral requirements.

But if you need some extra help, learn about using loans to buy a business in the UK.

You can also opt for alternative financing by applying for a small business grant. Although these grants are competitive and not available for all franchises, they can provide a valuable source of funding if you’re eligible.

If you want to learn more, you can read our guide on small business grants in the UK.

What to expect when you meet with a lender

Meeting with a lender is a significant step towards securing financing for your franchise so you need to prepare.

Initially, you will need to provide your business plan and any supporting documents so the lender can assess your creditworthiness, evaluate the franchise opportunity, and conduct a thorough analysis of your financial projections. They may also request additional information throughout the process.

The keys to successful lender negotiations are being organised, transparent and responsive so you can build rapport with the lender and increase your chances of approval.

Frequently asked questions about franchise finance

1. What is franchise finance?

Franchise finance refers to how much financial resources you need to start or expand your franchise. It involves securing funds to cover franchise fees, initial investments, working capital and operational expenses.

2. How much does a franchise cost?

Franchise costs vary significantly depending on the brand, industry and location. They can range from a few thousand pounds to several hundred pounds.

3. Can a franchisor help with franchise finance?

This depends on the franchisor. Some may provide limited assistance to help you secure financing while others already have working relationships with franchise lenders.

4. Why do some lenders reject finance for franchises?

Lenders may reject finance for franchises for any number of reasons. Some of these may include inadequate business plans, insufficient collateral, unfavourable market conditions, poor credit history, or the lender's lack of industry experience.

5. Can you get funding to buy a franchise?

Absolutely. But it’s vital that you follow the steps in this guide, so you’re prepared for the process.

6. How is a franchise financed?

A franchise is financed just like any other business. You can use personal savings, bank loans, small business loans or seller financing. But you may also qualify for a specialised franchise financing program.

7. Why is it easier to secure finance for a franchise?

Franchises already have a successful business model that’s proven to work. You also receive extra support from your franchisor during operation to help you through challenges.

8. How do I finance a franchise with no money?

Financing a franchise without money can be challenging since lenders prefer that you have “skin in the game”. But some ways to finance a franchise with no money include seeking franchisor support, asking friends or family for a loan or using personal assets as collateral.

Still looking for a franchise opportunity?

Securing financing for your franchise requires careful planning, thorough research and effective communication with potential lenders.

By understanding your franchise costs, creating a detailed business plan, selecting the right lender, and managing expectations throughout the process, you can increase your chances of obtaining the necessary funds.

But if you’re still unsure how to choose the right franchise opportunity, we’ve written a guide on how to choose a franchise in the UK. Then, when you’re ready, explore the industry leading UK franchises on our website.

Remember, preparation is key to securing franchise financing. By following the simple steps we outlined in this guide, you can set yourself up for success and embark on your franchising journey with confidence.