Franchise loans: funding to buy, open or expand a franchise

A franchise is a licence. The franchisor grants you, the franchisee, the right to use its brand, products, systems and know-how in return for an initial fee and usually ongoing fees or royalties. You own and run your outlet, but must follow the franchisor's operating standards. This differs from a chain, where a single company owns and runs every site.

• Initial franchise fee: the cost of the licence to trade under the brand. This varies widely by brand and sector.
• Fit-out and build costs: premises works, signage, furniture and fixtures. The franchisor usually provides an estimate.
• Equipment and vehicles: often financed separately through asset finance, which can keep the main loan smaller.
• Opening stock.
• Legal and professional fees: including a specialist franchise solicitor to review the agreement.
• Working capital: cash to cover wages, rent and costs until the business breaks even.

You are most likely to qualify if you are joining an established brand with a proven network, can put in some of your own money, have relevant management or business experience, a clean credit record and a plan built on the franchisor's figures. Lenders look at:

• The franchise brand: its track record, the number and performance of existing outlets, and the support provided.
• Your contribution: most lenders expect you to put some of your own money into the business.
• Your experience: management, sector or business ownership experience helps.
• A business plan: with forecasts based on the franchisor's figures and your local market.
• Credit history: personal and, where relevant, business credit records.
• The franchise agreement: its length, renewal terms and fees, because the loan should finish well within the term.

Many franchise loans are unsecured but backed by a personal guarantee from the franchisee or directors. Larger loans, or loans to buy premises, may be secured on property. Equipment funded through asset finance is secured on the equipment itself. Make sure you understand what you are personally liable for before signing.

Benefits

• An established brand that customers already recognise.
• A tested operating model, with training and ongoing support.
• Prior experience in the sector is often not required by the franchisor.
• Lenders may be more comfortable with a proven franchise than an untested idea.

Risks and costs

• Ongoing fees: royalties and marketing levies continue for as long as you trade.
• Limited flexibility: the franchisor sets rules on products, suppliers, pricing and location.
• Reputation by association: problems elsewhere in the network can affect your outlet.
• Renewal: franchise agreements run for fixed terms and renewal is governed by the agreement.

Read the franchise agreement carefully with a specialist solicitor, speak to existing franchisees, and check whether the franchisor is a member of the British Franchise Association.

Once the franchisor's cost breakdown, your business plan and evidence of your contribution are ready, a lender's decision on a straightforward franchise loan typically takes two to four weeks, and asset finance for the equipment can often run alongside in a similar period. The franchise process itself usually sets the pace: franchisor approval of you as a franchisee, signing the franchise agreement, securing the site or lease and agreeing the fit-out programme can take several months. Buying an existing outlet often takes longer again, because the lender reviews that outlet's accounts and the franchisor must consent to the transfer. Starting conversations with lenders early means funding is lined up before you commit to a site.

A single term loan is not the only way to fund a franchise, and many franchisees combine several sources.

• Asset finance for kitchen equipment, vans, signage or tills, so the main loan only covers fees, fit-out and working capital. See hire purchase.
• Fit-out finance for premises works on a new site; see fit-out and refurbishment finance.
• Deferred consideration when buying an existing outlet, where the seller accepts part of the price later; our guide to vendor finance explains how it works.
• A commercial mortgage where you are buying the freehold of the premises; see buying business premises.

Some lenders also offer loans under the Growth Guarantee Scheme, run through the British Business Bank.

Large brands set their own financial requirements and approval processes. Our guides to McDonald's franchise finance and Subway franchise finance show how these can differ.

If you own a successful business and want to franchise it, the upfront costs sit mostly with you as franchisor: legal work, trademark protection, an operations manual, franchisee recruitment and training. Business loans and cash flow finance can help fund this set-up phase, provided you can show the model is profitable and repeatable.