Raising Finance is often the biggest hurdle for anyone seeking to start a franchise in the UK and as we all know the big risks are financial. Hopefully this section will give you some guidelines to work to in order to be able to raise finance in the UK with confidence. We also address the topic of Insurance protection for your business as well as advice on preparing your business plan.

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It is a big step from deciding to start a franchise to actually opening your doors for business. For many, one of the biggest hurdles is approaching the bank for finance.

Of course, there is a lot of work to do before you will be ready to part with any money, you will need to research your chosen franchise, making sure that it is the right one for you and that you are fully aware of what is involved.

You will need to ensure that you can afford to purchase the franchise you are interested in, and set up your new business.

The first step is to establish how much money you can invest in the business - what can you afford to invest? Have you got savings, can your family help?

Hopefully this section will give you some guidelines to work to in order to be able to approach a Bank for finance in a confident way, with an awareness of the type of questions likely to be asked.

Banks have learnt that it can be safer to lend to franchisees of well-structured ethical franchise systems. The track record of the franchisor is most important.

For an established franchise, most of the major banks will lend up to 70% of the start up costs, for new franchises the figure will probably be around 50%. With this in mind,

• How much will you be able to borrow? Prepare a full list of your personal expenditure mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business in order to live.

• What security can you give to back up your loan? You might have a life policy with some value, or have equity in your home.

• Start preparing your business plan - this is a vital document to obtain finance from the bank. Your chosen franchisor will often help you with this.

As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure that you understand the figures, what are they based on, how much do you need to turnover in order to break even?

Some banks use the following approach to assess your request for finance

PERSON - Who are they lending the money to?
They carry out a full review of your background and reliability, your training, qualifications, and track record, financial resources, suitability to run the business.

A franchisor will also look at this to ensure that you are a suitable franchisee.

AMOUNT
Banks will normally expect the franchisee to contribute at least 30% of the highlighted ingoing cost of the franchise. This contribution should be unborrowed

Apart from the actual amount

• the purpose for which the money is going to be used and
• it's effect on your business
• is there sufficient demand for your product or service (the -fact that you are going to be investing in a tried and tested franchise format helps here)
• how will the money borrowed benefit the business?
• What type of finance are you looking for overdraft, loan or a package of financial services?
• how much are you investing in the business? Normally you are expected to contribute towards the total start up costs from your own resources
• have you asked for the right amount, is it too much or too little?

Your franchisor will normally help with setting out details of start up funds required and help with the preparation of cash flow forecasts.

REPAYMENT
It is not in any one's interest to lend you money unless you can repay it.

• Where is repayment coming from
• Future trading profits after allowing for all your other financial commitments or from the sale of an asset?
• What assumptions have been made in the cash flow forecast?
• What levels of sales are needed to break-even and are they achievable?
• Is there a contingency plan for any setbacks?

SECURITY

They must assess the risk of lending to you and decide whether security is required. This will depend on their evaluation of your business as a whole

• the prime source of repayment will be cash generated by your business and no amount of security will ever be acceptable if they feel that your business is not viable.
• The last thing they want to do is realise any security - they would much rather see a successful business continuing to trade.

They recommend that you take independent advice from your solicitor before you provide security.

If no security is available, they may be able to consider finance under the Government's Small Firm's Loan Guarantee Scheme, if your business is eligible. This is a government backed scheme to guarantee 75% of borrowing (for both businesses under and over 2 years established) where security is not available and where that lack of security is the only bar to a bank lending the money.

INTEREST & FEES
When they set an interest rate they take into account a number of factors including your stake in the business, security deposited and their evaluation of the risk involved. There are some special finance schemes for some of the larger, well-established franchisors. They may also charge a fee to cover the costs of setting up new borrowing and completing the security arrangements.

The actual provision of finance can be in several different forms and usually you can agree a package to suit your needs. Loan accounts are most often used for the purchase of assets - for instance property purchase, normally over a longer period and vehicle purchase - usually a much shorter timescale to reflect the rapid depreciation in value. Fixed interest rates are often available.

As a potential franchisee, you are however in a better position than a self-employed person setting up a business from scratch. You have the backing of a proven business format and details of how similar franchisees operate to show the bank.

© Cathryn A Hayes HSBC Bank - All rights Reserved

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You have bought a Franchise and your business depends on you…….YOU are the business, but if you become seriously ill and cannot work, or worse still you die have you thought of the implications.

What will happen to the business? How will your business expenses be paid?

Do you realise that if you die, the expenses of your business must be paid from your estate before any money is passed to your family.

We at whichfranchise.com have enlisted the help of Scottish Provident, one of the UK's leading names in life assurance, dedicated to providing a range of flexible protection plans which meet people's real needs.

Your business is important to you. You work hard to build it and make it profitable and you have plans to continue to build it further so it is vital that you have the self protection that will mean all your hard work will not go to waste.

Scottish Provident have developed SELF ASSURANCE, which can help to protect you against the financial consequences of unexpected illness or worse.

The SELF ASSURANCE range includes Death Benefit, Critical illness cover, for further information go to www.scotprov.co.uk. Death or earlier critical illness benefit, Disability income benefit and Premium payment cover.

These benefits could protect your business against the effect of loss of profits and also give you or your family the necessary time and money needed to reassess your position.

Scottish Provident recommends strongly that you discuss your individual financial protection and investment requirements with an Independent Financial Adviser (IFA).

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