Need funds to buy a franchise? Here’s our comprehensive guide to finding competitive financing for your franchise business.
One of the key considerations when buying a franchise is how to access the funds you need. Many lenders are cautious when funding new franchises, so finding the right loan can sometimes be a tricky proposition. Let’s take a closer look at the business loan options available and how to find the right loan for your needs.
Buying a franchise
A franchise is a business where the owners (franchisors) sell their business name, logo and model to independent third-party operators (franchisees). The franchisee is presented with a successful business model and assistance organising and managing their business, and in return they pay a franchise fee to the business owner.
Franchising is a well-established and recognised way of doing business in Australia, employing more than 470,000 people and providing an estimated annual sales turnover of $146 billion. However, finding the right loan to help you purchase a franchise can be difficult. While Australia’s biggest banks have accreditation programs set up that recognise and provide funding to successful franchise systems, not all new franchisees can qualify for this type of funding.
According to Griffith University’s Franchising Australia 2016 report, the average total start-up cost for a new retail franchise unit was $287,500, compared to $59,750 for a non-retail franchise. If you need financing to help cover these costs, read on for information on how to get the right loan to buy a franchise.
- Borrow up to $100,000
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NAB QuickBiz Loan Offer
An unsecured business loan up to $100,000 you can apply for in minutes.
- Interest rate from: 12.95% p.a.
- Interest rate type: Fixed
- Application fee: $0
- Minimum loan amount: $5,000
- Maximum loan amount: $100,000
Loans you can compare today to finance a franchise
When buying a franchise, you’ll have a number of specific loan requirements, including:
- Variable loan amounts. As the start-up costs quoted above demonstrate, the amount you need to borrow to buy a franchise varies depending on the business you select and the industry in which it operates. While one borrower might only need a loan of $25,000, the next might need to borrow $250,000.
- Funds to cover additional costs. In addition to start-up costs, there are several other expenses to consider when running a franchise. Equipment needs to be replaced, business premises require refurbishment and you’ll need access to ongoing working capital.
- Loan terms of up to 10 years. The loan terms of business loans for franchises are usually linked to the length of the franchise agreement term. This means that terms typically range from 5 to 10 years, but longer terms are available for borrowers who offer their residential property as security for the loan.
What types of franchise finance are available?
|Type of loan||Features and uses||Benefits||Drawbacks|
|Secured business loan||
|Unsecured business loan||
|Interest-only business loan||
|Low-doc business loan||
|Line of credit||
What to consider before applying for a franchise loan
Consider the following factors before applying for a business loan to buy a franchise:
- Your own financial situation. Lenders will take your personal financial situation into account when deciding whether or not to approve your loan application. You will need to take stock of your assets and liabilities, as well as whether you are able to offer a residential property as security, before beginning an franchise loan application. Without equity to your name, you won’t be approved for a loan to buy a franchise.
- Does the franchise have a financing option? Vendor financing is where franchisor offer financial assistance to new franchisees to help them get their business up and running. You then repay this financing in one of two ways: by paying a little extra on your regular royalty payments or by exceeding a pre-agreed level of profits for your franchise. Vendor financing is becoming increasingly common in Australia, so it’s worth checking if such a system is in place for your business before approaching any lenders.
- How much you need to borrow. As well as initial buy-in costs, you also need to consider the day-to-day costs of running the business. Get a full breakdown of the costs involved from the franchisor and remember to calculate your projected income when working out how much you can afford to repay.
- Bank accreditation. Some well-established and reputable franchise systems have bank accreditations. This means that because the banks know they are lending you money to buy a business based on a successful model, they will be willing to lend you up to 70% of the purchase price.
- Ask your accountant. Your accountant is the best person to advise you on how much you can comfortably afford to borrow and repay, as well as advise you on how best to fund your franchise purchase.
How to compare franchise loans
Consider the following when choosing a loan:
- The interest rate. Not only do you need to consider the interest rate that applies to your franchise loan, but also whether it is fixed or variable and whether it will be calculated on the principal or on the outstanding loan amount.
- Loan fees. Read the fine print for details on all fees associated with the loan. You’ll need to consider upfront fees such as establishment and application costs, as well as ongoing monthly or annual fees. Additional fees, such as if you top up your loan or make additional repayments, should also be taken into account.
- Loan amount. How much can you apply for? Is there a minimum loan limit? Make sure that any lenders that you are comparing allow you to borrow the same amount of money.
- Loan flexibility. Is the loan flexible enough to be tailored to your requirements? For example, can you make additional repayments without incurring a penalty? Can you top up your loan if you need more cash? Make sure you can design the loan so that it suits your needs.
How to apply for a franchise loan
You’ll need to provide a wide range of details to a lender when applying for a business loan for a franchise, including:
- Business financial information. The bank will want to know some key financial information about the franchise you want to buy, such as details of the business’s cash flow, profitability and sales forecasts. If buying an existing business, you’ll need to provide business tax returns, profit and loss statements and business bank statements from at least the past couple of years.
- Personal financial information. Next, the bank will need a personal financial statement that shows your own assets and liabilities, as well as recent tax returns and evidence of the equity you have to your name.
- Your business experience. Do you have prior experience running a franchise or working in the same industry as the franchise you want to buy? If so, this will improve your chances of approval.
It’s essential that you’re organised and that you have a clear plan before approaching a bank for financing. For help putting together a business loan application, as well as assistance comparing the loan options available, contact a broker or ask your accountant for advice.