Starting a franchise is a great way to become an entrepreneur and at the same time have support from the franchisor organisation. But starting a business does require spending some cash up front, there is a franchise fee for one thing and various other start up costs that will have to be funded before income starts flowing into your new business. Not many people have enough from savings to fund this so usually some borrowing needs to be put in place.
HOW DO YOU KNOW HOW MUCH IS REQUIRED?
Two key steps:
- How much you need to survive personally
- How much to start up and get the business to monthly positive cash flow
For the first point, do a personal survival budget. Review your spending, see where you can make savings and understand what you need to live on for at least 12 months.
On the second point, the franchisor will give you a good understanding of the initial franchise fee and the financial model that the franchise business operates to and how much it takes to get to monthly break even.
PREPARATION IS KEY
If you have done your personal budget, set that to one side. To borrow money, you now need a business plan that covers all the essentials of the proposed business including your skillset and experience.
As part of the business plan, the financial model of the franchise will forecast the performance; check it makes sense and seems realistic. Do some What If scenarios on the model i.e. if the sales are 20% lower and the expenses are 20% higher, what happens? This method along with the start up costs for the franchise and your personal survival budget will allow you to make a good estimate of how much you need to borrow.
WHO TO BORROW MONEY FROM?
First thing you must keep front of mind is any money is at RISK! This is very important as there are no guarantees of success and even the best laid plans can come undone. However, by demonstrating that you have done your homework and prepared as well as possible you will give lenders confident.
Friends and Family
You may want to ask your personal network if they would be interested in lending you the money. Treat this as a serious transaction and let them see your business plan and write down the terms of the loan. This means you let them know when you will start paying back, how long it will take and if they get any interest rate. It is an accepted route to get started although you do have to manage expectations and remember they could lose their money.
Start Up Loan
There is a government backed start up loan scheme that is worth investigating. The crucial point here is that it is generally an unsecured loan. This means that you do not have to provide security to back the loan like your house.
The British Business Bank has a department for franchises that you can read about here. There is a set process to guide you through to getting a loan to get your business off the ground.
Institutional Lending
This generally refers to banks. This is where loans will have to be backed by security and the terms and conditions will be set at a commercial level. Defaulting on a bank loan is serious business so your plans will have to be water tight and you must be confident that the business can handle the payback terms.
Help is Out There!
People launch businesses every day and there is help, guidance and support to get you started. Some bricks and mortar franchises may require start up funds from £250k upwards.
However, the more service-based franchises like RISE Fitness or Football Fun Factory means that the start-up requirement is less, around the £10k to £15k mark. It’s worth a serious look if you want to become a Boss.
