Running a franchise is no mean feat. As with any business, you will be expected to invest your own capital, so it is important that you get all the necessary advice to help you make the right decision.

A well-established franchise system will offer an investor a tried and tested business model with initial training, ongoing support, brand recognition and the collective buying power benefits that a network of businesses can bring. But you will still need the support and advice of a bank.

Banks, such as Lloyds TSB with a specialist franchise department are a good place to start. These banks regard franchising as a less risky way of setting up in business, this usually means that they will provide preferential terms for franchisees, whereas lenders that don’t have franchising expertise tend to treat prospective franchisees as they would any other business.

When you first contact your bank, it’s best to go straight to the Franchise Unit rather than approaching your local business bank manager directly. The franchisor you are dealing with maybe able to put you in touch.

It’s worth noting that franchising will not suit everyone. When considering whether franchising is the right option for you, one of the first decisions you need to make is what type of business you have an aptitude for - and what would you enjoy. Running your own business takes a lot of hard work, possibly long hours and a great deal of self-motivation, drive and commitment. An investment in a franchise reduces the risks of going into business however it doesn’t eliminate them.

A good starting point, when you’re looking for an investment opportunity is to consider franchises that are members of the British Franchise Association. They will have passed an assessment process and will have received an official accreditation. That’s not to say that other franchise opportunities should be ignored, but never lose sight of the fact that the level of financial help you get from a bank will reflect the strength of the franchise you are investing in.

The foundation stone of any financial assessment by a bank is the business plan. It’s this document that sets out your proposal to the bank; but, even the best plan can fail if it isn’t presented in the right way. If the franchise opportunity you are considering requires an enthusiastic individual with strong communication skills and the ability to sell, the bank manager will be looking for you to demonstrate these attributes when you come to talk through your plan.

Meeting the bank manager need not be a daunting prospect provided you are well prepared and understand your business plan. It is important to present your proposal confidently and to be able to answer any question the bank manager may have about the business. It is advisable to provide the bank a copy of the business plan in advance of the meeting so that the bank manager is well prepared with relevant questions about the business when you meet.

The level of finance available from a bank will depend upon the strength of the franchise system and your business plan. As a guide typically banks will lend up to 70 percent of the total franchise set up costs, including any working capital requirement. An investor must have a cash stake in the business and usually the bank will require security to cover the agreed lending. This will typically be a legal charge over a residential property, although other forms of security will be considered such as personal guarantees, commercial property and life policies with a surrender value.

Small Firms Loan Guarantee maybe an option if adequate security is not available. The scheme is a joint venture between the Department for Business, Enterprise and Regulatory Reform and a number of participating lenders. Its purpose is to provide finance where a lack of sufficient collateral is available for an otherwise viable business proposition. The DBERR will guarantee the loan under the scheme for 75% of the outstanding amount. The borrower pays a premium to the DBERR and interest rates are usually higher than a fully secured loan.

Other finance options maybe available from lenders such as asset finance for the purchase of equipment or vehicles, factoring for debtor book finance and corporate cards to support cashflow management. Speak to your bank manager about the most suitable financial structure for your business.

The ongoing relationship with your bank manager is important and you need to understand and agree the extent of support available to you particularly in your first year of trading. Some banks provide ongoing telephone call centre support whilst others offer an experienced local bank manager who you can meet on a regular basis to review the development of the business. Selecting the right bank is an important decision for the ultimate success of your business.

Top Tips

1. Select a bank with franchising expertise. A list of British Franchise Association affiliated banks is available at www.thebfa.org

2. Shop around for the bank that best meets your own requirements. Your existing bankers may not necessarily be the most suitable business bank for you.

3. Contact the bank’s Franchise Unit to arrange an introduction to a franchising experienced business manager based locally to you. Don’t approach your local business centre yourself.

4. Decide what you want from your business bank and make sure that they can deliver it. How easy would it be to arrange for your business manager to visit you at your premises?

5. Financial considerations are important but don’t decide on price alone. Select a bank that can provide the professionalism and ongoing support you are looking for.

6. Your chosen bank will require a copy of your business plan, financial projections and a breakdown of your personal assets and liabilities to consider requests for finance. Business planning templates are available from the banks to assist you.

7. Ensure that you are well prepared for the bank manager meeting to demonstrate that you have a good understanding of the business opportunity and your financial requirements.

8. Don’t start up business being under capitalised but only borrow what you need – Seek professional advice from an experienced accountant. You must be prepared to invest your own capital otherwise you can’t expect a lender to do so.

9. Any property given as security may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it – Keep the lender informed of issues within the business which may impact on the agreed finance.

10. Have a reserve of funds that you can fall back on in case the business takes longer than anticipated to get established.

Richard Holden
Head of Franchising

Lloyds TSB Bank plc
Tel: 07802 324018
Email: Richard.j.holden@lloydstsb.co.uk
Web: www.lloydstsb.com/franchising