Financing your franchise

Finding the right franchise can be a daunting task.

Finding the right franchise can be a daunting task.

It takes time and effort to research different industries and the franchise opportunities each offers. But financing your new business can be just as tough.

Franchisors don't just give a licence to any hopeful. You have to convince the franchisor that you have the skills to succeed. Then you have to consider how you will finance your new franchise.

There are many ways of raising finance, but all will require a good business plan to support your application. The detail and complexity of your business plan will be determined by the amount of finance you need. To be in a good position to secure a loan, you must write a business plan you would be proud to present to an audience.

A franchise has a better chance of securing finance from a bank, but you must still be able to invest your own money in the business. A franchisee usually has to put up between 30percent and 40percent of the start-up costs. The bank will subject you to a full credit assessment before granting the rest.

You stand a good chance of getting the finance if you can convince the bank that you will be able to pay back the loan. Franchises are a competitive market and banks look for the strongest enterprises, so shop around for the best deal.

Consider other options to finance your franchise. An overdraft provides you with flexibility and accrues interest only when the facility is used. But with the restrictions imposed by the recent National Credit Act, be sure to find out your bank's terms and conditions. Some have introduced monthly interest payments whether you use the facility or not.

Another option is factoring or invoice discounting. Here a company takes a payment from a specialist factoring firm to bridge a gap in finances while it waits for invoices to be paid. Factoring companies will usually pay up to 90percent of the outstanding sum.

But a business loan is often the best option for long-term finance to invest in assets. Business assets such as vehicles, machinery and computer equipment can also be bought through asset finance companies. The assets belong to the financing institution until the loan is paid.

Venture capital firms might be the best option for large investments. These companies provide funding in exchange for shares in your company. Some also like to influence the running of the business. These investors prefer to put their money in an established business or a businesses with strong potential for profit. A sound business plan will improve your chances of securing funding from venture capitalists for your franchise.

You could also approach a friend or family member to borrow funds. Here you have a chance of negotiating the repayment terms. Though borrowing from a friend might appear to be the ideal solution, your relationship might change and arguments could arise. Make sure that whatever you agree on is written on paper.

Remember that borrowing money comes with responsibilities. When you get the money, make sure it goes where it is supposed to. Once the funds are available, too many people think about other ways to spend it. Remain focused.