Financial Service Franchise Finance
Capitalise on Australia's strong financial sector with your own financial services franchise.
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The Australian home loan market is worth more than $1 trillion per year. The financial services sector is one of the most profitable and steady industries in Australia. Have you ever dreamed of claiming your own part of the financial services action? Read on for everything you need to know about finance for a financial services franchise.
Costs and profitability
How much does a franchise cost in the financial services industry in Australia?
Financial services franchises in Australia come in two broad groups: mortgage services and other financial services. Across all industries, the average value of franchise investments in Australia is approximately $25,000. While the start-up costs for mortgage services can be higher than the average, start-up costs for other services tend to run close to this average figure.
Example start-up franchise costs for mortgage services:
- Aussie, one of the most well-known mortgage brokers in Australia, requires a franchise investment of $100,000–$250,000.
- Mortgage Choice, another well-established mortgage broker, have a slightly lower initial franchise investment.
Example start-up franchise costs for other financial services:
- Small Business Accounting assists small business owners with accounting and financial document preparation. They require a franchise investment of $20,000–$50,000.
- Shoebox Bookkeeping provides bookkeeping services to sole traders and small businesses. They require a franchise investment of $20,000–$50,000.
- Fifo Capital provides short-term funding to small- and medium-sized Australian businesses. They require a franchise investment of $20,000–$50,000.
What other costs do I need to consider?
Franchising is governed by a Code of Conduct, administered by the Australian Competition and Consumer Commission (ACCC). Every franchisor must issue a disclosure document. This statement must set out the initial payments for the franchisor and other suppliers.
Whilst the law requires the disclosure of initial costs, other start-up costs must be considered.
- GST. The requirement to pay GST when purchasing a franchise depends on whether you purchase a new or existing franchise business. The purchase of an existing franchise will not incur GST, but GST is payable on the purchase of a new franchise at the standard rate of 10%. The good news is that you will recoup the GST paid when you lodge your first business activity statement (BAS). The bad news is that you will need to wear the cost in the meantime.
- Legal expenses. Legal expenses incurred during the purchase of a franchise can often fall on the buyer. As a buyer, you will also have your own legal fees to pay when obtaining independent legal advice during the due diligence process.
- Premises leasing and bond. If your franchise involves a physical office or shopfront, you will pay ongoing lease payments and a one-off security deposit. The initial security deposit required to secure the lease can be as high as three months' rent, outgoings and GST.
- Working capital. Working capital is the cash in hand required to finance your new business in the short term. While the financial services industry does not usually involve the sale of stock, working capital must still be taken into account. It is the amount you need to pay your outgoings, including wages, until your business starts bringing in an income.
- Equipment and fit-out. If your new franchise business involves a physical office or shopfront, the costs of equipment and fit-out can be significant. You will need to fit-out your new business according to the sometimes strict requirements of the franchisor.
- Training fees. Most financial services franchises require franchisees to have or work towards a certificate IV in finance and mortgage broking. Some mortgage services franchises even require a diploma of financial services and mortgage broking. Ensure that your training fees are included in your initial franchise investment, otherwise include these costs in your list of start-up expenses.
- Insurances. Ensure that you understand the insurances required, and whether any initial insurance premiums are included in the franchise costs. Find out if you can shop around for cost-effective insurance options, or if the franchise agreement requires a particular insurer.
How profitable are franchises in the financial services sector?
The financial services sector in Australia employs more than 450,000 people. With an annual contribution of approximate $140 billion to the country's gross domestic product (GDP), the sector is one of the largest contributors to Australia's economy.
There is every indication that Australia's financial services sector will continue to grow and will remain one of the core indicators of Australia's economic growth.
The rate of return of financial sector franchises varies depending on the type of business and the initial financial outlay. In general, the greater the initial franchise fee, the longer it will take for your investment to be returned. Initial franchise investments under $100,000 can reasonably be expected to return $50,000–$70,000 per year, whereas a significantly higher initial investment may return proportionately less.
What options are available to finance a financial services franchise?
Lenders can be cautious when considering new franchise finance applications. Luckily, your chances of securing funding for a financial services franchise increase when you choose the right type of loan and the right lender for your circumstances.
The most common finance options for a financial services franchise:
- Secured business loan. With appropriate security, this loan will fund 50–70% of the amount required. Residential property as security will put you in a stronger position. If purchasing a reputable, accredited franchise, the franchise itself can be used as security. When doing so, the loan term is unlikely to be longer than the length of the franchise agreement. Using your franchise as security may attract higher interest rates.
- Unsecured business loan. Without security, a much smaller loan amount is available. At most you could receive funding for 50% of the amount required. Unsecured business loans typically attract a higher interest rate and higher fees.
- Low-doc business loan. These loans are ideal for people who can provide residential property as security but who cannot provide adequate proof of income. Loan amounts are lower compared to secured business loans. Shorter loan terms, higher interest rates, and higher fees can apply.
- Line of credit. Rather than assisting in the purchase of a new franchise, a line of credit is often used to fund working capital. A line of credit allows you to access funds as needed up to a predetermined limit. Line of credit typically requires a residential property as security.
Business loans to consider
What should I consider when comparing my financing options?
With so many variable factors, it is important to consider your financial situation and the franchise itself before deciding on the right type of finance.
Consider the following:
- Loan amount. How much is your franchise going to cost, and how much of your own money do you have access to? If a large amount is required, a secured business loan could be the best choice. If a smaller amount is needed, an unsecured business loan could suffice. If you can afford the initial purchase costs but need to finance your working capital, consider a line of credit.
- Loan term. What is the length of term in your franchise agreement? If putting your franchise up as security for the loan, the loan term is unlikely to be longer than the term of your franchise agreement. If you require a longer loan term, you will need to put a residential property up as security.
- Bank accredited franchises. Some banks and lending institutions recognise certain franchises as reputable and low risk. If the franchise you're considering is accredited by a particular bank, the loan amount, interest rate and loan term can improve considerably.
- How do I get approved for finance for a financial services franchise?
- The key to finance application approval is understanding the eligibility criteria of the lender. Have as much clear, unambiguous information available as possible. This will show that you are being upfront and honest about your financial situation and proactive in the loan application process.
- Franchise information. Gather and prepare as much information as possible about your chosen franchise. If purchasing an existing franchise, obtain full audited financial statements, including profit and loss, for at least the previous two years. For a new franchise business, gather key financial information about the industry. Include financial information about other similar franchises in the area.
- Personal financial information. Compile your full financial history for at least the past two years. Include audited tax returns, notices of assessment, payslips and employment details, and information about your savings and other equity.
- Relevant employment and business history. Lenders want to know that you have the experience and business skills required to run the franchise you're proposing to purchase. Think of the process like a job interview and seek to prove to the lender that you have the skills and expertise to make your new business a success.
The financial services industry in Australia is solid and dependable. New mortgage lending was a $380 billion industry in 2016, a trend that has continued to rise for more than a decade. The demand for other financial services, such as accounting, bookkeeping and small business loans, continues to increase. As more Australians start their own businesses, demand for small business financial services can only continue to rise.
Finance for financial services franchises is readily available. With different options offering varying loan amounts and loan terms, it is important to understand your circumstances and how they fit into the various finance options available.
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