Buying into a tried-and tested model – assuming you choose an established, successful franchise – you’ll be seen as more of a sure thing by the banks.
If you’re reading this article, it’s probably safe to assume you’ve already discovered that franchising is right for you, you’ll also know that a having finance in place is one of the three major things franchisors are looking for in a new franchisee.
But a conventional bank loan is not the only way to raise funds to buy a franchise. Here are five of the most common ways to raise the cash to cover the franchisor’s fees and give you enough working capital to see you through the early stages.
Personal loan or remortgaging
Personal loans tend to be secured against an asset that you own – probably your home – or require a guarantor with the financial means to reassure the lender that they can pay on your behalf should you default.
If you have a mortgage, then you can get a bigger loan on better terms if you consider putting your home up as collateral. Remortgaging may mean that you can spread the cost of your borrowing over a longer term, but it does mean surrendering ownership of your home to the bank should you default on the loan.
Bridging loans, which ‘bridge’ a brief gap between when you need to make a payment and having the means to pay for it, are only viable if you have the capacity to repay them pretty quickly. If you are being made redundant from your job, for example, and there’s a gap between when you want to pay the franchise fee and when you will receive the payoff, then a bridging loan is a workable option.
Don’t borrow more than you can afford to repay within a few days or weeks – depending on the terms of the loan – or the loan will soon become expensive to manage.
Business development loans
Usually offered to startups, banks and specialist financial institutions offer business development loans to entrepreneurs who want an affordable repayment schedule and require up-front capital to get their business off the ground.
Obtaining a business development loan will be contingent on production of a comprehensive business plan with sales targets and financial projections. Franchise business plans must take into account the value of the brand, the proven business model and the franchisor’s marketing clout.
Friends and family
Franchisors will not usually accept franchisee applications from people who crowdsource their funding in the way that some start-ups do.
However, there is nothing to stop you approaching friends and family for help with fundraising. No single individual needs to come up with all the capital, and it could reduce your interest payments by minimising the amount you need to borrow from banks.
Unfortunately, this source of funding can cause tension with family or friends should it take you longer than expected to repay the money, so avoid this route if you don’t want your business and personal lives to intersect.
Unfortunately, sourcing funds from friends and family can cause tension with those groups, should you take longer to repay the money (though the penalty for missed payments is likely to be less severe than if it the money was lent from a traditional bank). Establish a realistic payment schedule, then keep to it.
Next essential read: 7 common franchisee mistakes, and how you can avoid them