A Guide to Raising Finance To Buy A Franchise

Raising Finance To Buy A Franchise

Published on: 2009-10-23

So you’re thinking of buying a franchise and you’ve realised you may need to raise some finance to be able to afford your new purchase. Well luckily for you, lenders do look slightly more favourably on lending to potential franchisees than they would for normal business start-ups. Raising finance to buy a franchise is by far the most difficult part of buying a franchise and it’s likely that you may be denied the funds by one or more banks. The important thing is find out where your proposal is lacking, address the problem, and then try another bank.

You may find that non of the traditional lenders are willing to finance your new venture because your proposal is not up to scratch. Lenders have a few criteria that you need to fulfil before they’ll consider lending you the funds needed, like:

How much of your own money are you willing to contribute?
How reputable is the franchise and do they have a track record of success?
Has the research been done and a business plan formulated correctly?

Other factors could work in your favour, like:
Have you ever run a business?
How much experience do you have running a business in this sector?

Lenders want to know that you are bearing some of the risk involved with starting up a new business. They also need some sort of security in case the business fails. If the franchise you intend to purchase is reputable, has a good track record of success and uses a reputable franchise model then most major banks would consider providing finance for 70% of the start-up cost. If the franchise is relatively new and uses a less reputable system than Banks will look to finance no more than 50% of the loan amount. You will still have to make a good case for borrowing the money and you’ll need to know you plan inside out before a bank would even consider lending the money.

Solid business planning will also be important when it comes to raising finance to buy a franchise. Most franchisors are happy to help you compile a business plan once they are satisfied that you are serious buyer and they no doubt have some experience raising finance for their current franchisees. Your business plan will form the cornerstone of your proposed new business and you should aim to stick to it so that you reach the goals set out. In some cases, the franchisor may have special arrangement in place with some or all of the high street banks, which could result in a lower interest rate on your loan.

High street banks are not the only source of finance available to potential franchisees. Many franchisees have managed to purchase a franchise by borrowing money from friends and family. This is not an option for everyone, but if it is for you then it may be worth exploring.

You may even be able obtain some of the finance needed to buy the franchise from the franchisor. Some of the larger franchisers have facilities in place to be able to provide some or all of the finance required. But remember that this scenario increases the risk for the franchisor. As a result, this option tends to be quite rare.

You could even use a combination of finance sources to make up the purchase price of your new franchise opportunity. Borrowing money from friends and family, to add to your own savings, might be enough to use as a deposit when approaching the bank for finance.

We wish you all the best in your efforts to raise finance for your franchise and cast off the shackles of full time employment to become your own boss.

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