Tips to Secure Bank Finance for a Retail Franchise

By Anthony Windress, Executive Manager Key Accounts, The Commonwealth Bank

If you’re a first time franchisee and you’re looking for finance to acquire a retail franchise, the key message is do your homework to show the bank you understand the business, be upfront about your own financial position and make sure you have a really solid business plan to show your bank.

When it comes to initially securing finance for a retail franchise, there are two approaches you can take.

First, you can talk to the franchisor about which banks have accredited the franchise.

This is important because if a bank has accredited a franchise it means it understands how the franchise operates, key revenue drivers and the cost base of the business. Although banks will lend against franchises that are not accredited, they need to do a lot more work to understand how the business operates in order to feel comfortable lending money against it. The franchisor will have a list of banks that have accredited the franchise and it’s an idea to ask the franchisor for the list so you can see which banks are already comfortable with the franchise structure.

Once you have a shortlist of banks that have accredited the franchise it’s an idea to identify people within the bank that have experience dealing with the franchise system of which you want to become part.

At the Commonwealth Bank, we have a unique system where specialists look after a network of businesses that belong to the same franchise. This allows our bankers to develop an intimate understanding of these businesses, which is very useful for potential franchisees looking to obtain funding to acquire a retail franchise. Some other banks appoint staff to look after franchises on a geographic basis, so one person might look after a dozen or more different franchise systems in the same area, which makes it tough to develop specialist knowledge of individual franchise systems.

Once you have identified the right banker for your business you will need to do extensive due diligence on the franchise you wish to acquire so you can demonstrate to the bank that you understand the business and its potential. On a personal level, the bank will want to know about your background, previous experience running businesses, especially prior experience in retail, future goals for the business and the business’s current financial position. It’s all about creating the foundations for a positive, long-term relationship with the bank, ensuring the bank understands who you are and that you also understand the bank’s expectations.

Most importantly, the bank will want to see a well-articulated, thorough business plan that shows the bank that considerable time and forethought has gone into making the decision to become part of the franchise system. With retail franchises, the business plan should include:

  • a full description of the business to be acquired, including what the business does, how it will be operated and how it will be staffed
  • full financial information, ideally going back two years (if the business has been in existence that long)
  • how the new operator intends to increase sales and revenue
  • a full marketing plan for the business
  • initiatives to make the business more efficient and increase margins
  • local demographics, including competitor businesses in the area, the number of people that live in the area, average income levels and likely foot traffic
  • any immediate capital expenditure required post-purchase

This last point is especially important; there’s no point underfunding the business by not being upfront about how much money will be required once the business changes hands.

Often, the business will need immediate expenditure on plant and equipment, for example if the front counter needs updating or if a new coffee machine is required. It’s a mistake not to account for these expenses in the initial loan application.

There’s no set format when it comes to putting together your business plan. The idea is to make it as comprehensive as possible to demonstrate to the bank that you have thought through the business, its potential and its risks.

Aside from the business plan, potential acquirers of retail franchises will need to give the bank a complete statement of their personal financial position. This statement should include a full list of the potential acquirer’s assets, including residential and investment properties, other investments such as shares and assets including cars. You will also need to be upfront about liabilities including mortgages and personal loans and credit card debts.

Ideally, the potential acquirer will be able to demonstrate a good track record of savings and a history of being able to repay loans, for example copies of loan statements. This is because if the bank can see the potential acquirer has a good history of being able to repay personal loans, it will give the bank confidence they will be able to repay business loans.

Your banker will also want to see full financial information for the business to be acquired, as well as commentary around the figures to show the bank the acquirer understands the numbers. The bank will want to know whether current business performance can be mirrored or maintained, whether there is the potential to improve sales and profitability and the actions that will need to be taken to achieve this.

With retail businesses, it’s crucial to be able to demonstrate an understanding of where the business fits in the local commercial ecosystem. Many retail franchises are located in major shopping centres and the bank will want to get an understanding of other similar businesses located in the centre, as well as whether a large grocery business is a draw-card for the centre. This information should be included in the business plan and communicated to the bank, as well as information about lease terms. Contact the centre management for information about foot traffic and other businesses located in the centre.

It’s also important to try to avoid the common mistakes new franchise owners make when applying for finance. The idea is to make the bank as comfortable as possible about your ability to pay back the loan.

By being open about your full financial position you may end up paying a lower interest rate than had you not declared your full financial position. You also might shorten the amount of time it takes to have the loan approved.

Ultimately, it’s about giving the bank as much information as you can about your own financial position, your history in business, as well as the history of the business you are purchasing. If you take the take time to collect and prepare all the information the bank will want to see about you and your new business you will put yourself in an advantageous position to secure the funding you need for your business to be a great success.

For more information about how the Commonwealth Bank can assist you to secure funding to become part of a retail franchise email Anthony Windress at anthony.windress@cba.com.au or call him on 0468 987 790.

*Important information: As this advice has been prepared without considering your objectives, financial situation or needs, you should before acting on this advice, consider its appropriateness to your circumstances.

Applications for finance are subject to the Bank’s normal credit approval. Full terms and conditions will be included in the finance offer. Bank fees and charges are payable. Commonwealth Bank of Australia ABN 48 123 123 124.