How to Start Franchise Funding in 2023

So, you're looking to expand your business into a franchise? Knowing where to start can be challenging if this is your first time venturing into a franchise business.

Starting any business is expensive, especially when opening several at once under an already-established brand. You've probably covered all the essential steps, like the initial meeting with the franchise brand, and now you're looking into franchise funding.

The franchise industry is significant in the UK, with 93% of UK franchises profiting from their business, so it makes sense that you want to get involved. In this article, you'll learn all about franchise finance, how to create a business plan, and how you can fund your franchise business.

What Is Franchise Finance?

Franchising is a business relationship between two parties.

It comprises the franchisor, who owns the brand and business system, and the franchisee, who can trade under the brand via a franchise agreement.

A franchise is when multiple businesses open and operate under an existing brand, following an established business model and structure. Famous examples of franchise businesses are Starbucks, most banking institutions like Lloyds or Barclays, Pizza Hut and more.

There are over 48,000 franchise businesses in the UK alone, and the industry employs over 710,000 people, which helps the UK economy. Franchises in the UK have to meet the European code of ethics and standards in franchising criteria and be certified by the British Franchise Association.

So, now that we’ve detailed what franchises are, let’s dive into franchise finance. Franchise financing is a loan that covers the cost of starting a franchise loan and covers both the initial and outgoing expenses of business operations.

A franchise loan can be from franchisors, but getting a business loan from a bank is more common to cover franchising costs. Franchise finance includes franchise business loans, franchise invoice finance, franchise trade finances, and franchise lines of credit.

To start creating franchises, you need to finance, and there are several ways to support franchisees with finances. Before we dive into how you can get finance for your franchise, let’s look into what franchise finance includes and what costs must be covered.

How Much Does Franchise Finance Cost?

When starting a franchise business, there are many costs and fees you need to take into consideration.

A bank loan can cover most of the cost; if you cannot get a loan, there are other approaches you can look into. Before you can start looking to lend money, you need a solid idea of how much you need to borrow.

The total cost of franchise finance includes the following:

• Initial franchise fee: When you buy into a business, you must pay off a one-off payment. The fee usually is 5 to 10% of the total investment cost, which covers the franchisor's cost of developing the franchise operation, recruiting you, and finding suitable premises.
• Training fees: Sometimes, training fees are included in the initial franchise fee, but if there are not, you'll have to cover the cost.
• Premises: There is a chance a franchisor will take the head lease and grant you a sublease, so you'll pay a premium or advance rent for the premises.
• Shopfitting: Premises under one franchise tend to look the same, so there will be a cost for designing and setting the premises to match accordingly.
• Initial stock: The franchiser should help you by telling you how much initial stock is needed, and you can purchase stock directly from the franchisor or an approved goods supplier.
• Equipment: You can hire or lease necessary equipment from third parties, or you may be able to purchase it from the franchisor.
• Working capital: This cost covers business expenses and initial salaries until the business starts making money.
• Promotional costs: Promotional costs pay for marketing, so local advertising, email marketing and other mediums to promote franchises opening. This cost may sometimes be included in the initial fee.

The average setup cost for financing a franchise in the UK is around £40,000. Depending on your franchise's size and setting up, the cost could be as high as £300,000. You can get help with financing. However, you'll still be expected to contribute. Once your calculations are sorted, it’s time to create a business plan.

Create a Franchise Funding Business Plan

Heading into franchise funding with a business plan will simplify the process.

The business plan is crucial, especially when trying to get financing. The lenders you approach need to see that they're putting their money into something worth investing. A good plan is critical to securing finance. There is a lot that needs to be included in your business plan.

In the following section, we will dive deeper into what you need to include in your business plan to help gain backing for your business innovation.

What to Include in Your Business Plan

You may be unsure what to include if you've never created a business plan. We've compiled a list of all the information you need for the plan.

Your business model and plan needs to include the following information:

• Executive summary: A brief outline of your business. Include what you do and how it will work.
• Personal finances: You must include your assets, expenditures, income and debts.
• Capital stake: You must include how much money you'll contribute to the franchise. Most lenders will make up to 75% of the total cost, and you need to ensure you've got enough cash to cover the rest to secure funding.
• Franchise overview: You need to include your customers, competitor analysis of other franchises and fellow franchisees, and market size.
• Experience and skills: Include your experience and skills and how they can help your franchise succeed.
• Business operation: Stock, equipment, premises, and vehicles.
• Management: Include the critical roles within the business and who fills them.
• Financial projection: You’ll need to flesh out a financial projection and include cash flow, profit and loss financial forecasts. You need to be realistic with earnings and cash flow. Financial predictions must be as accurate as possible. Be realistic about what you expect your franchise to make. Your franchising journey may not be smooth sailing, but by adding realistic expectations, based on information from your franchise, you can create an accurate prediction.
• Borrowing needs: You need to include how much money you need to cover franchise costs. Considering all the fees we listed in the cost section, every £ you request must be accounted for.
• Marketing strategy: You must include how you will attract customers and promote the business.

With all of the above information included in your plan, you can start exploring funding options to help you bring success to your franchise journey.

How to Fund Your Franchise

Not everyone has the money to fund a franchise just sitting in their savings account, and that’s okay. 

There are methods to help you with the funding process, from taking out a business loan to trying out schemes. Whichever option you choose, you will have to contribute.

Business and Bank Loans

You can apply for a loan from major high-street banks like Lloyds Bank, HSBC, Barclays, and NatWest. The British Franchise Association (BFA) accredits these banks and has specialised franchise departments.

Look around for the best interest rate and loans suitable for your business. Speak with your franchisor; they may already have built relationships with banks and could help you secure a loan with better interest rates.

Banks specialising in franchising typically lend well-established brands up to 70% of the total start up costs, including working capital. So, you'll need to cover 30% or more of the cost yourself.

If you're a less established franchise brand, the available finance from a lender may be lower. To qualify for a bank loan, you must have a positive credit history, a strong business plan, and collateral that can be used as security against your loan.

You can consider two types of loans: a small business loan and a flexible business loan. With a small business loan, you typically can borrow up to £25,000 and repayments and interest rates are fixed for the life of the loan and usually range between 1 and 10 years.

A flexible business loan is ideal for limited companies borrowing over £10,000 or partnership businesses borrowing over £25,001. You can choose a fixed or variable interest rate, and you can choose to pay interest either monthly or quarterly.

Repayment periods can range from one to 15 years. We recommend picking the loan that is most relevant to your own business.

Some banks will allow asset finance. Asset finance is a way to secure finance for required working capital for the initial stages of your business. It involves borrowing against the security of assets like your accounts receivable or inventory. Banks will have their own leasing companies for items like vehicles.

Before you apply for your business loan, you need to consider repayments, interest rates, and the length of the borrowing period. Remember to avoid late payments on what you borrow; interest rates will vary depending on which lender you choose.

Enterprise Finance Guarantee Scheme

The Enterprise Finance Guarantee (EFG) scheme by British Business Bank is ideal for start ups and small businesses, as they facilitate lending and have supported over 35,000 small businesses in the UK. They support various business finance products like revolving facilities, invoice finance facilities and asset finance.

EFG can guarantee up to 75% of your loan up to the cost of £1 million and is a good backup if you lack the securities required for other loans.

Apply for Grants

You can apply for grants to help with funding if you're struggling with other lenders. We've compiled a list of grants that may be available to you:

• Local Enterprise Partnerships: Set up to support local businesses across the UK, there are currently over 38 operating around the UK.
• BFA-approved grants: There are several grants you can apply for, such as Prince's Trust, Start Up Loans, and Virgin StartUp.
• Government grants: You can see what grants and help are available in your local area on the UK Government website. They regularly introduce new grants to support businesses.

Final Thoughts on Franchise Finance

Funding franchises isn't an easy feat. However, with a strong business plan and plenty of funding options, you can start to see your ideas flourish before you. Once funding succeeds, you can invest your time into your franchise and join the 93% of other franchises turning over a profit.

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