Financing a franchise without seeking professional advice can be a very frustrating process. That’s why we’re working with Richard Holden, Head of Franchising at Lloyd’s TSB to provide free financial advice.
Some of the financial issues Richard covers, include:
> How to obtain financial backing from your bank
> Building a closer relationship with the banks
> The Golden Rules of franchise finance
Lloyds TSB has a dedicated team of franchise specialists. To find out how Richard and his team can help finance your franchise, call them on 0800 587 2379 or visit www.lloydstsb.com/franchising.
How to obtain financial backing from your bank
There are been much debate in the media in recent months about lending to businesses however what is the truth about raising finance for your franchise investment?
The reality is that franchise specialist banks, such as Lloyds TSB, have continued to finance sound business proposals to people looking to invest in well established franchise opportunities throughout the economic downturn.
There are advantages recognised by some banks in operating a franchise over an independent start up business which helps build your case for financial support. Banks generally consider well established franchises less risky as the franchisee is investing in a tried, tested and proven business model with initial training and ongoing support from the franchisor.
The secret to securing the finance support you need is to present a strong business case to the bank manager. How do you go about giving yourself the best opportunity of winning the backing from a bank?
Most franchisors know the people to contact in the bank’s franchise department and can help you with an introduction. Franchising is different from setting up an independent business and you require the support from someone who has a good understanding of the market. It is therefore beneficial to speak with these franchise specialists at the bank rather than approaching your local business manager directly.
It is good practice for franchisors to regularly communicate with the bank’s franchise unit to keep them up to date with developments in their franchise. As a result the franchise team will have a better understanding of the opportunity and are better placed to provide initial guidance with your proposal.
The bank can provide advice about investing in a franchise and the financial support that maybe available to you at an early stage, even before you have made a commitment to invest. However before a bank manager can provide an actual decision on a lending request you need to prepare a business plan.
It is reasonable to expect the bank to thoroughly review your business plan and to ask for supporting evidence to back up your financial request before being in a position to provide a decision. Your plan should be accompanied by an asset and liabilities breakdown, your last 6 months personal bank statements and evidence showing where your own stake in the business is coming from.
By preparing a detailed plan covering the key areas a bank manager will be looking at, you will speed up the decision making process. Remember a business plan is more than a vehicle to secure the financial commitment you are looking for it is also a working document to refer back to benchmarking how the business has performed against your original projections.
You will be expected to commit at least 30 percent of the total set up costs from your own savings and the bank may require you to provide security to cover any agreed finance. A business plan needs to be punchy to grab the bank manager’s interest. Don’t make it too long but it should cover the following areas:
Executive summary – Brief overview of your requirements
Business and personal objectives – Short, medium and long term
Market analysis – Research carried out to demonstrate the local demand for product or service, competitor analysis and potential customers identified
Business operations – Premises, equipment, staff, suppliers, IT, Health & Safety
Marketing plan – How you are going to achieve your sales
Management details – CV’s for key personnel, experience, skills and attributes
Financial requirements – Your own capital stake, finance required and available security
Financial Projections – A minimum of two years cashflow and profit forecasts together with any assumptions used (The bank manager will be reviewing whether the projections are realistic and achievable)
Financial Accounts – For existing businesses a copy of the previous financial accounts should be provided
SWOT Analysis – Strengths, weaknesses, opportunities and threats to the business
Wherever possible provide the bank manager with a copy of your business plan before your meeting. This will give them the chance to review the plan beforehand and prepare questions. It is advisable to practice the presentation of plan beforehand. The bank manager will expect you to understand your plan including the financial projections and to be able to confidently answer their questions.
A business planning template is available from the Lloyds TSB Franchise Unit by contacting us on 0800 587 2379 or email franchising@lloydstsb.co.uk A detailed and well presented business plan is an essential tool in securing support from a bank.
Richard Holden
Head of Franchising
Lloyds TSB Commercial
The Lloyds Banking Group has franchise specialists throughout the UK to support your franchise plans. For further information contact us on 0800 587 2379.
Building a closer relationship with the banks
Developing strong relationships with your suppliers is a key element to building any successful business. The bank’s franchise department should be viewed as an important supplier to your business.
As a franchisor, the relationship you have with the banks franchise team is often crucial to your franchisee’s success at securing the financial support they need to get started or to take their existing business forward. Just a few basic steps can help you with your plans to recruit more franchisees. And for your franchisees to secure the bank’s support at the best terms.
Take the issue of updating the bank with developments to your franchise and providing them your latest financial and management accounts. I can count on one hand the number of franchisors who send information to the bank to update their records without being prompted. Ultimately, a lack of recent information about your franchise could mean that your franchisees don’t secure the best possible deal. So it really is worth taking the time to update the bank’s franchise team at least once a year.
Then there is the business plan. It’s hard to overstate the importance of getting the plan right, and yet a surprisingly large number are poorly prepared and presented.
Franchisees need to take ownership of their business plan and be meticulous in their research to prepare realistic and achievable financial projections. Many prospective franchisees will not have approached a bank for finance before and others will never have put together a business plan. But as a franchisor you are in the perfect position to help new franchisees prepare to present their plan to the bank manager and let them know what questions they should expect.
You can even give advice on how they should best approach the bank, explaining how they should get in touch with the bank’s Franchise team rather than approaching their local bank manager directly. They will ensure that your new franchisee meets someone who has the experience to assess a franchise proposition.
Track records of existing franchisees that operate accounts with the bank are always reviewed when assessing a new lending proposition however ensure that the bank has the complete picture. Don’t rely on them to have identified all of your franchisees that bank with them. Ensure that the bank has an up to date list of your franchisees.
If any of your franchisees are experiencing trading difficulties let the bank know what actions you are taking to support them.
Finally, as in any relationship, remember nothing beats a face-to-face meeting. If you haven’t recently met with the bank’s franchise specialists pick up the phone and invite them over. That will mean the bank will have the chance to update their records, but it will also give you the opportunity catch up on the latest developments at the bank and the support that is available to your franchisees.
Richard Holden
Head of Franchising
Lloyds Banking Group
Tel: 0800 587 2379
Email: franchising@lloydstsb.co.uk
Website: www.lloydstsb.com/franchising
Richard heads up the Lloyds Banking Group Franchise Unit and the bank has a team of Franchise Managers based throughout the UK to support both franchisors and franchisees.
The Golden Rules of franchise finance
Much has been said in the media about the Credit Crunch and the impact it is having on financial institutions however the fact is that some UK banks that specialise in franchise finance remain positive and still view this as an attractive market. Raising the required funds to finance your franchise does not need to be a daunting process if you follow a few golden rules.
Franchising Golden Rules
> Next to marriage and buying a home, setting up a business is one of the most important decisions you are ever likely to make. And investing in a franchise is no less important – in fact it is a business marriage. It is essential that you thoroughly research your chosen franchise and territory before making a commitment to invest. Of course, trading performance of any business is also directly linked to the commitment of the business owner. Not everyone is cut out to run a franchise, so think things through carefully, get professional advice and when you explore your options, don’t leave any stone unturned.
> Attend a British Franchise Association seminar and purchase their comprehensive franchisee guide which will assist with your research into whether franchising is the right option for you. The British Franchise Association runs seminars throughout the year across the UK. The Seminar consists of a series of presentations delivered by speakers with practical experience of franchising. Full of relevant case studies, it will highlight best practice and help you to identify the potential problems and pitfalls of franchising.
> Don’t be pressured into making a commitment before you are ready to do so. If a franchisor tells you that you will miss the opportunity unless you sign today then walk away. Ensure that you have the full support of your family and discuss what would happen if things didn’t go according to plan.
> Evaluate your own strengths and weaknesses and ensure that the franchise is something you will enjoy doing day in day out. Remember you are making a long term commitment as it may take several years before you achieve a return on your investment.
> Ask questions and don’t take things at face value. Lloyds TSB has produced a valuable guide to help you with the type of questions you should be asking the franchisor so you can make an informed decision. Speak to several existing franchisees about their experiences before making a commitment to invest. The franchisor will often tell you that the terms of the franchise agreement are not negotiable however it is essential that you get the document independently checked and explained to you by an experienced solicitor who is affiliated to the British Franchise Association before signing on the dotted line.
> Before approaching finance providers you need to prepare a business plan. The franchisor may provide some assistance with the plan and banks can provide a template to assist you. The importance of a good business plan can not be overstated. The initial objective of the document is to help you raise finance for the business however it will also help you understand what you wish to achieve from the business and is an essential document to review the performance against your projections alerting you to anything that is not going according to plan. Presentation of the plan is important to create maximum positive impact and you should practice delivery of your plan before speaking to a lender so that you come across professionally.
> Well established franchises generally have much higher success rates than stand alone start-ups therefore banks are willing to consider lending a higher proportion of the total set up costs. Typically franchise specialist banks will lend up to 70 per cent of the investment, subject to status and a review of your business plan. For less established franchise opportunities the financial support from a bank maybe at a reduced level. Banks that do not have any franchising expertise will treat your business as they would any other ignoring the many benefits and attractions of operating as a franchisee and preferential financial terms will not be offered to you.
> Don’t over-stretch yourself financially. Have a contingency reserve fund in case the business takes longer than anticipated to get off the ground. Consider a capital repayment holiday at the start of the loan if it is going to take time to build your client base. A fixed rate loan option will guard against future interest rate rises. Speak to your bank about cashflow management options such as overdrafts, factoring or corporate cards. Consider asset finance for purchases of equipment and vehicles which may free up your credit line with the bank should you need to raise additional finance at a later date. An experienced bank manager can help you structure your finance appropriately.
> Banks will generally require security to cover the finance provided, although this will be determined in the bank’s assessment of the business plan provided. The most common form of security would be to provide the Bank with a legal charge over a residential property with sufficient equity, whether it is your main residence or an investment property. There are finance options available if your do not have adequate security and you should discuss these with your bank manager.
> Work out your personal expenditure requirements including mortgage, utility bills, loans, credit cards, food, vehicle running costs and all other living costs to establish whether you will realistically be able to draw funds from the business to meet your commitments. There is a danger of being over-optimistic with your business projections so it would be prudent to get your accountant to review them beforehand to ensure that the forecasts are realistic and achievable.
> All too often business planning is given a great deal of attention when businesses are looking for finance at the initial stages and then not looked at again. The business plan should be treated as a working document and never allowed to gather dust. Naturally, as the business develops your business plan should be updated. Should you need to approach the bank for further finance at a later date, then an updated business plan will help demonstrate that you have your finger on the financial pulse of your business.
If you overburden yourself with debt, you will restrict your chances of success however on the other hand you must ensure that the business is not under-capitalised. If you are uneasy about the financial commitment you are undertaking then leave your savings intact and wait for a more suitable opportunity. Banks with specialist franchise departments such as Lloyds TSB will be able to give impartial advice to support your research.
Richard Holden
Head of Franchising
Lloyds TSB Commercial
Tel: 07802 324018
Web: www.lloydstsb.com/franchising
