Franchising is a well-established model, with much higher rates of success than going it alone. This is why accessing funding to set up a franchise can be easier that establishing your own new independent business.
In this article we guide you through the different ways to finance your new franchise.
Personal savings
You may already have all or part of the funds needed to invest in your new business. If you choose this route, you will have no interest payments or debt to pay back which is clearly an advantage.
However, you may prefer to take out a loan and hold on to some funds as a contingency.
Friends and family
Many franchisees use funding provided to them by someone well known to them. If funds require repayment, there may be greater flexibility in terms. They are also likely to be extremely supportive of your new endeavour.
Franchisors may ask for evidence of the source of funds for anti-money laundering purposes.
Bank loan
The major banks in the UK (Lloyds, HSBC, NatWest and Barclays) have specialist franchise departments. They will be familiar with the business model and concept of franchising. Speak to your franchisor who should be able to support you in approaching the relevant contacts at the bank.
Banks typically lend franchisees a maximum of 70% of the investment required to fund their franchise. This may include support towards the initial franchise fee, equipment, premises, fit out and working capital, subject to their normal lending criteria. The franchisee will need to provide evidence to the bank that they can cover the other 30% once a business plan has been approved.
In July 2024, the British Business Bank released details about the ‘Growth Guarantee Scheme’ which replaced the ‘Recovery Loan Scheme’ (RLS). The new scheme will provide support to UK small businesses over the next two years and provides easier access to finance.
Through this scheme, the government guarantees 70% of the finance to the lender, which means lenders cannot take your principal private residence as security for the funds. However, as the borrower, you are still 100% liable for the debt.
The scheme has around 40 accredited lenders. The interest rates and lender fees will vary but will take into account the 70% Government-backed Guarantee.
Retirement Funds
Individuals can draw out pension monies from the age of 55 (57 from 6th April 2028). Usually, a quarter of the fund can be taken as a tax-free cash sum.
Jonathan Cross, Independent Financial Planner, at Financial Planning by TaxAssist, writes: “SIPPs can be a very useful way to fund the purchase of commercial premises from which your franchise will trade, including protection of the property asset should the business fail.
Other benefits include:
- The income acquired from property held under the pension scheme is exempt from income tax.
- If a gain arises on the disposal of the commercial property, the capital growth in the property will belong to the pension itself rather than an individual and will not attract capital gains tax.
- The commercial property owned by the SIPP will not form part of your estate for inheritance tax purposes, and
- Investing in property through a SIPP allows you to leave money in your pension for your family to inherit after your death, and they may be able to draw a tax-free income from this.
It’s important to take independent financial advice to avoid any surprises which can include:
- Understanding that you must pay a commercial rent to your pension, (a better option than paying a third-party landlord!)
- A SIPP administrator will control various aspects of the pension including ensuring rent payments are made in a timely fashion.
- Your responsibilities in terms of property maintenance etc.”
Top tips
- Evaluate your financial situation before you undertake your research into a franchise. Assess your credit score, your current debt and your available personal funds.
- Carefully research your chosen franchise and make sure you understand their total investment requirements.
- Work with your franchisor to prepare a detailed business plan. If necessary, you can then take this to your chosen lender to discuss your requirements. When you are reviewing and signing agreements, ensure you understand all the terms and conditions.
- Make sure to use your funds wisely and follow your business plan. Approach your franchisor for help and advice when needed.
Funding a franchise requires careful planning and consideration. The best choice will depend on your personal financial situation, the type of franchise you are looking at and your long-term business goals. Consulting with a financial advisor or franchise consultant can provide additional guidance tailored to your specific needs.
July 2024
