Financing your franchise

James Brouillard Managing Director 10 THOUSAND FEET What are the banks offering and what are the alternatives?

James Brouillard | Managing Director | 10 THOUSAND FEET

There are as many estimated entry costs for franchise business opportunities as there are franchised business models. Most franchisors will list their entry cost as an approximate all-inclusive number of what the "turn key" cost will be. Take into account, however, that this in many cases is the minimum amount and does not include the working capital and contingency money you should have on hand to see your business through its first year of operation. So what happens when you find that perfect franchise business opportunity for you, but do not have the immediate cash to invest? This is a common scenario as most folks do not have $50,000 or more sitting in their bank accounts waiting to be withdrawn or a generous relative willing to lend them such.

There are three primary ways in which most franchisees go about funding their franchise business opportunity:

1. Bank Financing:
Direct financing from a bank will comprise the majority of loans used to start any small to medium sized business. Major banks such as ANZ, Commonwealth, NAB and Westpac have specialised loans geared specifically to purchase franchise business opportunities. You will find that these banks have "approved" franchise systems which they affiliate their services with. These approved franchises are looked over by the banks and financials, disclosure documents and franchise agreements are submitted to the bank every year to keep that franchise business opportunity on the bank's preferred list. Franchises that are not on a preferred list can be funded by the bank but the terms might not be as generous and the process will take longer as the bank will need to do more research at that time. Keep in mind that financing for a preferred franchise system is not guaranteed as the potential franchisee still needs to be looked at by the bank as credit worthy.

2. Broker Financing:
Using a broker to help source financing can ease a lot of the frustration and pressure of sorting through various deals on offer and how to best structure them. The broker will most likely be dealing with the banks mentioned above but knows how to negotiate with each to get the best deals and ultimately will drill it down to one. Most should also offer assistance in building your business plan and offering help in overcoming potential roadblocks by the bank. Brokers will collect a commission by the bank that gets your business so there should be no fees for their service. Obviously, do your homework to find a reputable broker in your area.

3. Vendor Financing:
This used to be more commonly practiced when banks did not get into the specialised franchise lending that is seen today. There are still some franchisors that will offer vendor financing either partially, fully or by reducing or eliminating certain costs or fees. However, those that do will have very specific criteria that must be met to qualify.

Whichever course you choose you should be consulting your accountant and financial advisor to insure the right financial moves are being made.

To find a franchise business that is right for you, refer to the Top 10 in different categories section of this page. If you prefer to search for a particular franchise business, the A-Z Franchise Listing section lists franchise business opportunities alphabetically.