How to get a franchise loan

If you’ve decided to buy and open a franchise, it’s important to consider how you will finance it.

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    Rachel Wait

    Page written by Rachel Wait. Last reviewed on April 15, 2024. Next review due April 6, 2025.

    For most people, the best route will be sourcing franchise funding from a bank, but you’ll need to be able to prove that your business can be a success to be able to get the funding you require.

    Buying a franchise can be a safer option than starting a business from scratch as you’ll be able to buy the rights to sell goods or services from a company that’s already established. But setting up a franchise doesn’t come cheap, so here’s all you need to know about how to get a franchise loan.

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      Here's how to secure funding to buy a franchise business:

      Research your franchise costs

      First of all, make sure you fully understand the costs involved in getting your franchise set up. These costs include:

      • The initial franchise fee: This is a one-off fee to buy-in to the business and it can range from hundreds of pounds to a million or more.
      • Equipment: You might have to cover the cost of equipment such as machinery.
      • Initial stock: This might be bought from the franchisor or an approved supplier.
      • Premises: This will be one of the biggest expenses and could include your rent as well as the cost of fitting out your shop. 
      • Vehicles: You might prefer to buy a vehicle outright, but most people take out a lease or hire purchase agreement, so you’ll need to fund the initial deposit.
      • Working capital: To cover the initial salaries and other business expenses until you start generating cash. 
      • Promotional costs: To cover the cost of local advertising and marketing. 

      Create a franchise business plan

      Next, you’ll need to create a business plan as lenders will want to see this when you apply for finance. You should be able to get a lot of the information you need from the franchisor’s brochure or website, but your business plan will need to include the following:

      • Executive summary: A brief description of your business and its objectives, as well as an overview of how it will work.
      • Your experience and skills: Outlining how your past experience will help make your business a success.
      • Overview of the franchise: Including your target audience, size of market and competitor analysis.
      • Business operation: Including your premises, stock, equipment and vehicles.
      • Management: Outlining who will fill key roles in your business.
      • Marketing strategy: Showing how you plan to attract and retain customers and how you will advertise the franchise.
      • Financial projections: Including cash flow and profit and loss forecasts.
      • Borrowing needs: Outlining how much money you require.
      • Capital stake: Outlining how much money you will be investing yourself.
      • Personal finances: Including your personal assets, income, expenditure and debts.

      Find and choose a franchise loan and a lender

      Once your business plan is complete, you need to look for a lender that is used to dealing with the franchise market. Many high street banks have a franchise department, such as Lloyds, NatWest, Barclays and HSBC, and these will be able to support you with your franchise as well as offer funding. You might be able to borrow through a fixed rate or variable rate loan, or through asset finance and leasing. You could also consider an overdraft, but this is better suited to short-term borrowing as interest rates can be high.

      Make sure you shop around and compare interest rates and finance options carefully to find the right one for your business. You can also look at finance such as government grants and the government-backed startup loans scheme.

      How much can you borrow?

      The amount you can borrow with a franchise loan will depend on a range of factors.

      With established franchise brands, lenders will usually ask that you provide at least 30% of the business set-up costs and this needs to come from savings rather than personal borrowing. If the brand is less well-known, you might need to stump up more than this before a lender will be happy to offer you a loan.

      Be aware that you will usually need to secure the loan against an asset – typically your home.

      Your loan application is more likely to be turned down if you have a poor personal credit history, a poor business plan, if you don’t have an asset to use as security and if your projected turnover is deemed unrealistic.

      How much will franchise finance cost?

      Again, this will depend on several factors. These include the type of finance you choose and how much you need to borrow – this will depend on the sector of the business and how much is included in the franchise package. 

      It’ll also depend on factors such as your personal credit history – the better this is, the lower the interest rate you’re likely to secure.

      Use our franchise loan calculator to work out the total cost of your finance and how much you’ll need to repay each month.

      How can I spend franchise funding?

      You might want to use franchise funding to cover big expenses or to help improve cash flow. It can help cover your franchise fee, as well as the premises costs, initial stock costs, initial staff wages, branded workwear and marketing.

      Keep in mind that you will also need to pay for business insurance. You might need to take out any of the following, depending on the type of business you run:

      What are the alternatives to franchise finance?

      If your application for franchise finance is unsuccessful, there are some alternative options you could consider. These include:

      The Enterprise Finance Guarantee (EFG)

      The Enterprise Finance Guarantee scheme was set up in 2009 and is now run by the government-owned British Business Bank. Through the scheme, the government will guarantee up to 75% of your bank loan amount, which makes it a good option if you don’t have a large amount of security to back up what you’re borrowing. You can borrow between £1,000 and £1.2 million over a term of between three months and 10 years. You can apply for a loan with any of the British Business Bank’s commercial partners, which include high street banks, challenger banks and independent lenders. 

      Local Enterprise Partnerships (LEPs)

      There are 38 Local Enterprise Partnerships (LEPs) across England. These are voluntary partnerships between local authorities and businesses that provide business funding, support and guidance in their local areas. 

      Government grants

      There are a number of government grants available to support businesses so keep an eye on the gov.uk website to find out if there are any in your area.

      Get matched with a lender through Swoop

      It’s sensible to seek professional advice before applying for any type of franchise finance. This will help you to work out how much you can afford to borrow and the best way to apply.

      Here at Swoop we offer independent business loan comparison tables that let you compare interest rates, fees and term lengths to enable you to find the best loan for you and your business.

      Register with Swoop to find the best financing option for you and let us guide you through the application process.

      Written by

      Rachel Wait

      Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

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