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Franchise trends 2018-04-11

How to Be Successful in Obtaining Finance in Franchise?

When it comes to arranging finance, your business plan needs to include all the information required by the lender that is evaluating your proposal.

By Rob OrmeMarketing Manager, Franchise Finance

Choosing the right franchise for you is a major decision.This decision-making process will involve a significant amount of time, thought and research. When you decide on your chosen franchise, the next step is to secure the right amount and type of finance.

Before starting your search for funding, you need to understand the total investment required, how much you can contribute from your own resources and how much finance you require. It is important to be aware that the total investment is the sum of all costs associated with the set-up of the franchise, including working capital and VAT.

The amount of working capital required in the business is one of the most critical aspects of your financial planning. If you don’t have enough working capital, then you are likely to run out of cash and you will go out of business!

To identify the amount of working capital and ultimately the total investment, you need to prepare a comprehensive business plan. The business plan should cover three main points. Firstly, it should set out the investment needed to make and the returns you expect. Secondly, the plan will become your finance application. Thirdly, you should use your business plan to monitor your performance and manage your business on an ongoing basis.

Getting the business plan right is crucial if you are going to be successful in raising finance to start and grow your franchise. We often speak to prospective franchisees who have approached a lender directly and have been declined for finance, not because they are not credit worthy, but because their plan does not satisfy the lender's requirements.

When applying for finance in the UK, the business plan needs to include all the information that is required by the person who is evaluating your proposal on behalf of the lending institution. It should start with an executive summary which should give a concise overview of the business opportunity and funding requirement. It needs to identify who the owners of the business will be and provide their personal information such as name, address, dates of birth and a copy of their CV’s. Any lender will perform a credit search on the business owners and will need this information to be able to do this. You also need to set out your personal assets (what you own) and liabilities (what you owe).

The lender will want to understand your household expenditure and what income you have to cover this. They will want to ensure you can afford to pay your bills while you are growing the business. If your income is coming from the new business, make sure this is included in the financial projections.

The business plan should include information about the franchisor, the business model itself, how the franchisor will train, support and develop you, also the marketing activity. It should also set out your business objectives.

This brings us to the financial forecast element. You should include profit and loss projections, a separate cash flow forecast and a forecast end of year balance sheet (I would suggest these cover at least 3 years).

The profit and loss projections will show the trading activity for the business, the sales, costs and how much profit you expect to make. The cash flow forecast will set out the incoming investment from you and any other finance, the set-up costs going out, the money coming in and out through the trading activity and VAT. Put simply, it is a forecast of what your bank account will look like at the end of each month!

Remember, these are projections of what you predict will happen.In real life’, it is difficult to predict. The closing balance on the cash flow each month needs to be sufficient to allow for fluctuations in the timings of when money is received and paid out and additionally for the possibility that you may not achieve the sales levels expected. This is where you set the amount of working capital you need.It is important to consider if you require an overdraft facility.

This uncertainty is part of the risk of setting up any business but with a franchise you'd- risk this because the franchisor has, through its pilot operation or existing franchisees, already tested and proven the theory. This is why banks love lending to franchises because they are proven business concepts. If you can reference the financial performance of existing franchisees as the basis of your financial assumptions in your business plan, this significantly enhances the credibility of your proposal, thus maximising the likelihood of getting your finance application approved.

  This article has been authored by Rob Orme, Marketing Manager at Franchise Finance Limited. He is the youngest recipient of the British Franchise Association's qualified franchise professional award.

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