Can I borrow money to open a franchise?

An initial sum of money is required to start a franchise business. Find out more about the available franchise finance options in this article.

Can I borrow money to open a franchise? | Shire Business Group

Author Name: Shire Business Group

Becoming a franchisee is an exciting prospect – be your own boss, make a business your own, the list of benefits goes on. However, the hefty initial investment can prove to be a barrier for many people who want to get started with a franchise. 

Taking out a loan in order to open a franchise can be a superb option should you need the funding. We’ve gathered together some of the most important information on franchise finance to help you make the right decision for you and the business that you want to grow.

Do you need to borrow money to open a franchise?

Technically, no. If you’ve got the capital available to open a franchise, then a loan might be superfluous to your needs, but seeing as initial investments can range anywhere from £10,000 to £500,000 (or more), it’s likely that a loan of some kind will be required in order to get started.

There’s a wide variety of finance options for franchisees to choose from. This can depend on the franchisor. Many of them have established links with lenders already, but some will expect you to source your own funding.
“Our flexible franchise finance options are designed to support both franchisees and franchisors with their business funding. “

Do you need to borrow money to open a franchise?

Technically, no. If you’ve got the capital available to open a franchise, then a loan might be superfluous to your needs, but seeing as initial investments can range anywhere from £10,000 to £500,000 (or more), it’s likely that a loan of some kind will be required in order to get started. 

What are the costs of setting up a franchise?

Much of this loan will be used to cover your initial setup costs. Depending on the franchisor, your expenditure will vary:

  • Initial franchise fee – usually 5-10% of the total investment, the initial franchise fee is designed to compensate the franchisor for their recruitment operation, franchise running costs and other time they need to spend on running their business. 
  • Functional capital – it’s important that you have some liquid capital available to support your budding business before it becomes profitable. This is in order to cover salaries and various other costs.
  • Equipment – the franchisor might sell this, or you might need to hire or lease what’s required.
  • Promotional expenditure – getting the word out is important, no matter the business. You’ll need to invest in local advertising, email marketing and more.
  • Training costs – the franchisor will take time to get you up to speed with your new business. This is often covered by the initial fee, but can also be billed separately.
  • Fittings – many franchisors will insist/arrange for your premises to be standardised to match the brand.
  • Vehicles – many franchisees decide to take out a vehicle lease or hire purchase agreement should vehicles be required for the business. Others may decide to purchase their vehicles outright.
  • Buildings – rent fees will need to be paid while the business is being established. The franchisor may choose to grant you a sub-lease.
  • Opening stock – you’ll need to invest in a sensible amount of initial stock to ensure that your business can function in the early stages.

How do I fund my franchise?

Once you’re ready to take out your loan, there’s a few things that you should establish in advance. Many lenders will want to see proof of your ability to run your new business. Any investment is a risk, and you need to prove that you’re capable of paying your loan back. If you’re ever unsure of how to proceed, we recommend seeking assistance from franchise finance experts

Create a business plan

Most franchisors will provide a baseline business plan for you to follow, expediting this process somewhat, but you’ll still need to establish a roadmap of where your business is currently, where you expect it to be over the next few years and how you plan on achieving this. 

Lenders will want to know exactly how you intend to spend their money, and how you expect to pay it back. Your franchisor should provide you with key statistics, such as previous successful marketing plans, their main demographics, operational procedures, initial & ongoing costs, etc., meaning that you should have everything you need to put together a strong business plan.

Remember, though, that this is your business at the end of the day. It’s important that you put your own ideas into the plan, both to show that you’re capable, and to motivate you to follow it.

Check your credit history

A good credit history is essential in order to prove that you’re a safe investment. If you’ve got a poor history, lenders might assume that it’s too risky to lend you money. Making changes to your spending can help to improve your credit rating.

What financing options are available to franchisees?

There’s a wide variety of finance options for franchisees to choose from. This can depend on the franchisor. Many of them have established links with lenders already, but some will expect you to source your own funding. 

Start-up loans

One of the most important loans you can take as a franchisee, your start-up loan acts as the catalyst that propels your business, helping you to achieve your dreams. Many lenders are more comfortable lending money to a franchisee; an established franchise can demonstrate that its business model is functional, meaning that your business has a greater chance of success. 

Asset finance

An excellent way to purchase, lease or refinance important equipment, asset finance is used by franchisees across the world to gain immediate access to the assets that are crucial to success. Asset finance plans are flexible, meaning that there’s an option available that suits your business goals.

Invoice financing

If your franchise business leaves you waiting for payments from customers or clients, you might want to immediately release cash through invoice financing. This type of finance provides businesses the flexibility to make meaningful decisions without being bound by late payments. 

Overdrafts

While it’s best to not rely on an overdraft, they can provide a flexible method to borrow funds when you need it most. Overdrafts can prove costly, and often come with particularly high interest rates, so most franchisees see this as a short-term option to use if required.

Fund your franchise business with Shire Business Group

At Shire Business Group, we believe that everyone deserves the opportunity to fund their dreams. Our flexible franchise finance options are designed to support both franchisees and franchisors with their business funding. 

To find out more about how we can help you build your dream business, get in touch with us today. Every year, we help tens of thousands of start-ups and SMEs across the UK to access the funding they require.

Finance for business use customers only. All finance is subject to credit status, approval, terms and conditions.

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