Holly Barnes, Franchise Lead Generation & Marketing Manager, DC Strategy
The journey to funding your franchise
Over the last few years, securing finance to buy a business has become increasingly difficult, especially with the recent changes that came into effect in the highly-regulated lending industry. We all know that it’s never been harder to borrow from the “Big Four” banks and brokers have also been affected by the recent regulatory updates impacting the sector. Ultimately, you’re going to have to jump through multiple hoops to get a finance loan approved. You’ll need to ensure every single checkbox is ticked. Moreover, you’ll have to prove your financial position and your ability to repay the loan - showing that you’re ‘risk-free’ or ‘low-risk’.
The entire industry has been placed under a microscope, making the process extremely involved for anyone wanting to obtain finance loans and credit under stricter criteria and compulsory rules set out by the Australian Prudential Regulation Authority (APRA). APRA licenses and regulates banks, credit unions and brokers by developing and enforcing standards and prudential guidance that promotes prudent behaviour by authorised deposit-taking institutions (ADIs).The Australian Securities and Investments Commission (ASIC) is a consumer facing regulatory body, and it oversees the Financial Ombudsman Service, and also takes action against financial service providers who mislead, are deceptive or demonstrate unconscionable conduct. Whilst APRA is responsible for ensuring that Australia has a stable, efficient and competitive financial system, ASIC has responsibility for market integrity and consumer protection. It also regulates investment banks and finance companies.
So, where do you start?
Begin with a goal and the outcome in mind, of course. Here are the seven most important factors to consider (and action) before starting your franchise-funding journey:
1. Determine how much money you'll need
Think about the long-term repayments and the expenses you will experience when buying a franchise. Keep in mind that if you’re borrowing too much money, you might be paying more in interest than you need to, while borrowing too little means that you won’t have enough for everything you need to operate the business effectively. Without enough finance, you may need to apply for a second loan. Make sure your estimation is as accurate as possible to ensure you have the best return on your investment.
2. Have a solid and detailed business plan
It's not enough to simply own a small business, you need to manage it too. Your plan should clearly show how the business will manage expenditures and income to achieve profitability and how long this will take. You need to give as much detail as possible for your finance loan to be approved and pass the mandatory checks. Moreover, you need to prove that you will be able to earn enough money to afford your monthly repayments and living expenses.
3. Consider your repayment timeline
Weigh up your options and think about the bigger picture. How long will it take you to pay back the loan? How much will you be able to afford to repay per month? Will it be a consistent amount or can you pay back more as the business grows? Ask yourself these questions to determine a realistic approach that will help with your business profitability. Your business plan needs to follow a strategic process that will show your step-by-step proposition to ensure business growth.
4. Support your business case
Consider how profitable it will be in concrete dollar values and draw on as much evidence as possible. Use factual data and evidence to show a proven business model and systems in place to run the franchise business. Your lender will make a yes or no decision based largely on how much you can convince it that the business will be profitable. You must have formal financial projections, showing clear profit and loss expectations.
5. Show your strengths and experience
Having relevant small business management and financial experience will inspire more confidence in potential lenders. Don't hesitate to mention how your own business history can help you succeed and that it also provides a great platform for future success. Remember to promote yourself and provide proof of your past experience, mentioning any relevant qualifications and business development.
6. Create a plan and set a budget
Break down what exactly you plan to spend the money on and set a budget. This is not only necessary for your own planning, but it's also essential information all lenders need to know to make a decision. If the money will go towards staff or refurbishment costs, for example, they might expect a slower return on investment. If it's going towards supplies, inventory, store fit-out and marketing, then they might expect a quicker return.
7. Keep it simple
Rather than applying for hundreds of loans with a low success rate, your time will be better spent focusing on a small number of good products and lenders to pitch to. Before applying, you need to compare business loans to rule out any that have unreasonable interest rates or excessive fees. You want your franchise business to thrive, not fail because of the financial repayments.
How do you secure the best finance options?
If you need to access finance to fund your franchise, a finance broker is the ‘middle-man’ source who usually arranges loans for a fee (paid by you or the lender or both). The fee is a small percentage of the loan amount, generally between 1% and 2%. Moreover, a finance broker deals with the lenders for you and arranges a loan on your behalf.
By law a credit provider must follow the guidelines set out by ASIC, stating that they should:
- make reasonable inquiries about your financial situation, requirements and objectives
- take reasonable steps to verify your financial situation.
With this, you need to ensure that you're in a position to qualify for a loan. Sailesh Bijlani, known as ‘The Lifestyle Broker’ and part of National Pacific Finance group, believes that franchise loans aren't out of reach for most people, saying that; “Business lenders represent an important part of the financing industry, as bank loans remain out of reach for many entrepreneurs. Franchise loans, which have less-strict borrower qualifications than traditional business loans often transfer the funds in your account a lot faster. Generally, these loans may have higher rates than bank loans. However, they can be crucial sources of capital to many small business owners, including franchise owners, who would not otherwise qualify for financing. Moreover, some of the lenders offer rates that are on par with big banks.”
If a finance broker is arranging a loan covered by the credit law, the finance broker must have a licence. You can check to see if the finance broker is registered by phoning 1300 300 630 or at connectonline.asic.gov.au.
Good luck on your journey to funding your franchise!