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Raising the finance to buy your franchise

As a prospective franchisee, you will be concerned to know how much, and from whom, you might be able to borrow money to finance your cost of buying a franchise and establishing your business, and to cover your initial working capital requirements.

No responsible franchisor will accept as a franchisee someone who has to borrow his total financial requirements, even if a lending source is willing to provide the full sum. Very few franchisors finance their franchisees; there are sound reasons why they should not. Finance should be kept out of the franchisor/franchisee relationship.

There have in the past been times when franchisees have found that finance was not so readily available as it is today, but since 1981 all the major banks have progressively entered the marketplace and the situation has changed. They all now have franchise specialists on their corporate staff, and are committed to encouraging the development of franchising and lending to franchisees in appropriate cases.

The reason why the banks have concentrated their interest on franchising is because they have come to recognise and acknowledge that it is a safer way of establishing a new business. Furthermore, with the proven concept and the “umbrella” of the franchisor’s organisation, the ability of the business to generate sufficient profit to enable the franchisee to repay his obligations and to live comfortably is more readily appreciated in the City. This enables the banks to consider lending a greater proportion of the franchisee’s setting up costs than would normally be considered appropriate.

Each of the banks which has entered the field has adopted the same approach with one recent notable exception with the appointment of a central unit to disseminate knowledge of franchising and individual franchisors to the bank’s branches. The alternative would be to educate the whole branch network about franchising and in evaluating a proposition. This would result in an inconsistency of approach, which would be damaging and confusing, and cause the corporate know-how to be spread so thinly as to be incapable of being put to good use.

The centralised structure enables a consistent attitude to be established by the bank towards each franchise system and propositions can rapidly be evaluated. As a result, the local manager in the field, faced with a prospective franchisee borrower, can be provided, not only with a brief about the franchising system in general, but also about the specific proposition which he is being asked to consider. Thus, the bank’s decision about whether or not to be formally involved in any franchise is taken by specialists with the requisite knowledge and experience.

Despite these advantages there have been some attempts at decentralisation and it remains to be seen whether this approach will work.

In some cases the bank’s decision on whether to lend to a particular individual is taken at local level by the branch manager, who will interview and evaluate the applicant, in the light of all the relevant information about the franchise scheme and the franchisor, which he has received from his head office franchise department. In addition to this central fund of information, the branch manager will contribute to the decision making process his own local knowledge of the marketplace and, if the applicant is already a client of his bank, the latter’s suitability for a loan to start-up in business for himself. There has also developed a much higher level of awareness of franchising at branch level within the banks which is proving beneficial. In other cases the lending decision is taken by one of the franchise specialists who then passes the franchisee to the appropriate local branch.

The banks’ franchise managers are a good source of information. In the course of their activities, they interview most of the franchisors who are offering franchises. This provides them with a perspective which not many can match, as well as an invaluable market awareness of what is happening. They will always be helpful, but you cannot substitute their judgement for your own and nor would they want you to. Although banks may well be identified with a particular franchise by the franchisor promoting the availability of a finance arrangement, the banks do not, of course, warrant its suitability for any particular person. The banks do point out that a prospective franchisee should make a detailed evaluation of the franchise before making his decision. The banks are merely making a decision on whether to lend, and if so, how much, based on all relevant factors within their relevant lending criteria.

As a prospective franchisee, you should ascertain whether the franchisor with whom you are negotiating has a relationship established with a bank. If he has you will be put in touch swith either a member of its franchise team or your local branch manager with whom you can discuss your financial requirements. If more than one bank is involved, compare the offers of finance; there are likely to be differences in the terms of the offers which will be made, and you must select those which best meet your particular needs.

A word of caution – do not assume that, because a bank or finance house offers finance, you do not need to investigate.

In making finance available, no bank, or finance house, gives any assurance, guarantee, or warranty, that the franchise proposition is sound. Remember also your investigation of the franchisor maybe more up-to-date than the bank’s enquiries upon which they would have made their assessment.

When taking up a franchise and adopting a career as a self-employed businessman, one is entering a business world of risk. The prospective franchisee must, after making his own enquiries, assess the risk for himself, and decide whether he wishes to run that risk in return for the benefits he believes he may obtain. The process by which a franchise is evaluated is, of course, a valuable aid in establishing which type of business and which particular franchisor is right for the prospective franchisee.

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