Tips for accessing Finance
For the overwhelming majority of franchisees, access to funding forms a critical component of their initial franchise purchase.
For the overwhelming majority of franchisees, access to funding forms a critical component of their initial franchise purchase. The turnkey cost (total setup cost) of a franchise business typically exceeds the savings that a prospective franchisee has to contribute. Therefore, funding is required to fill that gap. But where do you start? What lender/s do you approach? And what information will they require?
Accessing funding does not have to be a complicated process, below are some simple steps you can follow to make it as painless as possible.
When to seek finance
A mistake that some new franchisees make is that they apply for finance far too late in the process. If your franchise purchase is reliant on funding approval then this is something that should be secured earlier rather than later. As a general rule, finance approval should be obtained before any long-term commitments are signed (like property leases or the non-refundable component of the franchise fee).
Where to get Funding
Choosing the right finance partner is important as there are only a select number of lenders that have the appetite to fund “startup” franchise businesses. Some of the major banks will have appetite for franchise lending (though they may require you move all your bank services to them), there are also independent lenders that specialise in funding the franchise sector. Those lenders that specialise in funding franchise networks typically represent the best chance of a finance approval as they are assessing the application not just on the strength of the individual applicant but also on their brand knowledge and trading history with that particular franchise brand. A recent report by Medici also found that the approval rate with alternate lenders was twice that of the banks.
In some cases franchisors will have relationships with lenders and can provide them with information that enables franchisees to gain easier access to finance, so it is a good idea to ask the franchisor if they have any funding arrangements in place with lenders. If they don’t it’s even more important to approach lenders that speciallises in franchise finance.
What to prepare
The amount of funding required will typically determine what information lenders will request. But in order to put your best foot forward it is important to be prepared with the basics. Lenders look favourably upon applications that have been well prepared and contain all the information upfront.
Complete a Business Plan
A business plan can be either brief or detailed and the amount of funding requested would determine how detailed this needs to be. Typically, lenders are looking for the following topics to be addressed at a minimum:
Owner experience, summary of the business, operations & management, location, market & marketing, SWOT analysis, the cost of the business setup and how it will be funded.
Franchisors can often provide business plan templates otherwise there are plenty of templates available online.
Preparing a profit and loss forecast as well as an estimate of cashflow demonstrates to the lender that you are entering the business with realistic expectations of revenue as well as the ongoing costs associated with that business. It will also show the lender at what point the business will break even and how much working capital may be required to support the business through the startup phase.
For a startup business a 2 year forecasted P&L is recommended. Franchisors will often have a template spreadsheet they can provide to you, or alternatively they are available for download online.
Assets & Liabilities statement
An assets & Liabilities statement is a standard document that lists an individuals assets in one column (including property, cash, vehicles, shares etc) & their liabilities in another column (mortgages, vehicles loans, credit card debt etc). Lenders will look at this document to determine the asset position and debt level of the borrower. Having this information pre-filled will save you time at the application stage.
Check your credit file
Your credit profile and credit score will form a large component of the lenders decision making process. Any adverse information on your credit file can often result in an immediate decline. Sometimes applicants don’t even realise that there has been a default listed on their file, so it is best to get a copy of your own file and address any adverse information before applying for finance. You can acquire a copy of your credit file for free once a year via one of Australia’s leading credit reporting agencies.
Additional Income sources
While commercial finance will be assessed on the ability of the business to service the loan. It can help if there is another revenue stream outside the proposed business. This could be a spouse’s salary, you may remain employed in some capacity outside the proposed business or you could have other investment income. External income assists in that it can be seen as a supplement to director or owner wages particularly during the initial business phases. If the living costs at home are covered without the reliance on a wage or profit from the proposed business then you should make mention of this as part of your application.
Businesses are run by people not numbers, so make sure you promote your strong attributes to the lender and tell them why they should back you. If you worked in your family’s small business growing up then that is important, if you have held management positions or looked after the books for your spouse’s business then make sure the lender knows. If you don’t have a lot of business experience but you have assembled a group of advisors that will support you then that is also important.
Lenders these days have access to an extraordinary amount of information and will more often than not find whatever it was the applicant was trying to conceal. If a lender uncovers something you were trying to hide, then chances are they will look harder for other things you may have ‘failed to mention’ and take a negative view towards the transaction. Addressing any issues or weaknesses with the application upfront demonstrates to the lender that they are dealing with an applicant ‘of good character’ and they are more likely to take an optimistic view towards the application.
Talk to the Lender
Before submitting an application you should speak with someone at the organisation you are seeking funding from. Most specialist lenders will have a sales team who are tasked with liaising with clients and qualifying them prior to application stage. These individuals deal with the credit team on a daily basis and understand the requirements for approval.
This is important for a few reasons. Firstly, multiple enquiries on your credit file will have a negative impact on your credit score. This in turn makes it progressively harder to access finance. By talking to the lender before submitting an application they should be able to give you an indication of whether the transaction meets their credit requirements and means you should not have to submit multiple applications (multiple credit enquiries on your file) before you find the right one.
Talking to the lender first can also be a time saving exercise. They will be able to tell you exactly what information is required to review your application, and what the turnaround time will be. Some lenders can take several weeks or even months to make a lending decision and if this doesn’t fit your time frame then you can select a lender with a quicker turnaround time.
Every lender is different. Some will not lend to certain industries, some will not lend to businesses trading less than 2 years, and some will require different forms of security. But if you do your research, are prepared with the basic information, and talk to the lender before submitting an application. Then navigating the funding path can be a relatively simple process.
Dan Toms is the sales director at CFI Finance. He has been specialising in franchise finance for over 10 years and works with most of Australia’s established and emerging franchise brands. He is a Registered Franchise Lending Specialist and holds a Certified Franchise Executive (CFE) qualificatio