Raising Finance to buy a Franchise

by Mark Scott (National Franchise Manager - NatWest)

Raising finance for a franchise is not as daunting as it may seem. Most of the main banks have a dedicated franchise section only too willing to provide finance for the purchase of a franchise, although it should be noted that it is the individuals that they assess, rather than the franchise.

People are generally able to borrow more to establish a franchised business than they would for a conventional start-up venture. All the banks recognise that franchising is usually a safer way to get into business and, for established and proven franchise systems, they are prepared to lend, subject to status, up to 70% of the start-up costs including working capital. For a new, or less established franchise, this figure is nearer to 50%, much the same as a conventional business.

Typically the borrowing will be taken as a fixed rate loan repayable over a term no longer than that of the franchise agreement.Variable rate loans are also available if you want to gamble on interest rates. Some of the borrowing could also be taken as an overdraft to provide an element of working capital. Certainly the VAT element of any franchise fee is normally funded by way of overdraft until it is refunded by HM Customs.

The types of lending discussed so far are normally arranged at local Business Centres and security for any borrowing may be required.Security is usually provided in the form of a second mortgage over property but could also include a charge over surplus cash, insurance policies or stocks and shares. If there is no security available the bank can look for a guarantee, up to 75% of the amount borrowed, from the Department of Trade and Industy’s Small Firms Loan Guarantee Scheme. The remainder is considered as unsecured borrowing.

Where vehicles or equipment are required for the franchise these can be financed under a lease or hire purchase agreement. Some franchisors will have facilities in place with known companies assisting with this type of finance, such as Lombard Business Finance.

The rates on any lending can vary depending on the contribution, security and track record of individuals.

Mark Scott
National Franchise Manager
NatWest

Mark Scott joined the NatWest Franchise section in 1998 as Senior Franchise Manager and was appointed as Head of the team in December 2002. He joined the bank in 1982 and has a wide range of experience within the small business sector and has managed relationships with national organisations, such as the DTI and Business Links. More recently Mark has been a regular speaker at seminars for prospective franchisees and franchisors, including The Franchise Alliance and the BFA.