Prospects for franchise lending in 2012
Cathryn Hayes - HSBC Head of Franchising
There can be no denying that 2011 has been a challenging year. However, HSBC lent at record levels to franchised businesses in 2011, and we are continuing to actively support the sector with the aim to further grow our lending book in 2012.
Banks are more likely to support a business with a well-researched and structured business plan, particularly those that demonstrate a strong understanding of their finances. Franchising has a number of advantages here. Although not recession-proof, the wide spectrum of sectors covered by franchising means that the UK franchise industry is likely to fare better in these difficult times. The failure rate for franchises is much lower than for standalone start ups. This is predominantly due to the support of the franchisor and other franchisees in the network, who can help new franchisees avoid the pitfalls associated with starting up a business.
So, how can franchisors help to support their franchise owners both new and existing? Monitoring and control is even more important than ever – knowing what is happening in your network has never been more important.
Planning is vital – even though none of us know what is round the corner, a robust business plan can help to keep a business on track and ensure that franchisees know which areas to focus on to keep their businesses healthy.
Try to ensure that your franchisees are working well with their bank. These are the problem areas – things which can lead to a breakdown in the relationship:
- not supplying agreed information on time
- failing to make loan repayments
- repeatedly exceeding overdraft limits
- unexpected or persistent trading at a loss
- not using facilities for the agreed purpose (such as personal expenditure)
Look at your own requirements as a franchisor too. We deal with a wide range of franchisors, from fairly small businesses setting out on the franchise route, to major corporates. Regardless of size, it is important to:
- Have a clear view of where the business is going – what are your aims for expansion? How much are you going to need to spend to achieve that?
- Keep good financial records and forecasts. In this way you can apply for new finance before you need it urgently. Banks will look more favourably on such requests as it shows you are in control and can plan.
- Understand how financial ratios work. They are good indicators of a business’ health and these are what banks use to assess your financial health and that of your franchisees.
Consider alternative methods of funding working capital, like invoice finance, which involves raising finance using your debtor book. The advantage of this is that cashflow is directly linked to business expansion. This method is not suitable for all businesses – your bank will be able to advise you.
Another funding method to consider is asset finance to fund the purchase of equipment for the business. This can help ease cash flow by spreading repayments over a period of time instead of making a one-off investment.
It is worth investing time to develop a strong relationship with your bank, making sure they understand your business model and can work with you to develop financial packages tailored to your individual needs and those of your franchisees.
To conclude, HSBC is definitely open for franchise business and finance will be available to quality applicants who can demonstrate they have a good understanding of their chosen franchise model and the financials of their business. We look forward to working with you and your franchisees in 2012!
Posting from the monthly HSBC Connections newsletter. For more information or to get on the mailing list for the newsletter please email franchiseunit@hsbc.com
HSBC Growth Grants could benefit Franchisors
Are you are a franchisor with an annual turnover of between £100,000 and £2m with ambitions for growth?
HSBC are currently offering the opportunity for businesses to win one of four HSBC business growth grants that are on offer to entrepreneurs seeking to expand their businesses.
Two grants will be awarded to businesses using innovative ideas to grow their businesses within the UK and two further grants will be awardded to businesses that have the aspiration to develop their opportunities overseas.
For fill details and an application please visit: http://www.businessgrant.hsbc.co.uk/. Closing date for applications is 31st December 2011.
Tags: Franchise Finance, franchise funding, hsbc
HSBC franchise unit shares their top tips for writing a business plan
Cathryn Hayes - HSBC Head of Franchising
We thought we’d share some tips to help franchisees present a strong business plan and help them to raise finance.
Other sources of income
It is vital for a new franchise to provide enough income for the owner to live on, in addition to servicing any borrowing they have, particularly in the early years. Many franchisees have a supportive partner behind them who often continues to earn a regular wage. This additional household income reduces the franchisee’s dependence on the profits of the business. It is therefore important that a franchisee provides a summary of all their domestic income and expenditure, demonstrating just how much money needs to be taken out of the business.
Understand the figures
We see many examples of franchisees simply presenting figures given to them by their franchisor, without really understanding what they mean. As franchisors it is essential that you encourage your prospective franchisees to take ownership of their figures, particularly the cash flow forecast. If they are unable to explain these to the lender in a convincing fashion, they could be turned down for the finance they need to get their business off the ground.
Cash flow forecast
In contrast to the above, we are sometimes presented with a cash flow forecast and little else. The bank won’t just focus solely on figures. The business plan needs to demonstrate the franchisee’s business skills and experience and that they have fully researched the local competition and understand their market etc. Whilst the cash flow forecast tells a lender what should happen, the business plan explains how it could be achieved.
It’s not just about the franchisee
It is important that Franchise Unit hold up to date information on your franchise to share with lending managers. It would therefore be helpful if you forward your audited accounts to us on an annual basis and provide details of any management changes, franchise cost increases, modifications to the franchise model or legal agreement. These regular updates will provide the franchise team and the lending manager with a good understanding of the franchise.
Whilst the majority of business plans we receive are perfectly suitable, we hope these few pointers will help make it easier for franchisees to obtain the finance they need.
Additional help and assistance on writing a business plan can be found at HSBC’s Knowledge Centre, an online resource to help small business owners whatever stage their business is at.
Posting from the monthly HSBC Connections newsletter. For more information or to get on the mailing list for the newsletter please email franchiseunit@hsbc.com
