Franchising remains a popular business model, with over 1,300 franchise businesses in Australia alone. If you're planning to buy a franchise, it's important to understand the funding options that are available.
Find out what to look for and compare business franchise loans below.
Compare franchise loans
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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 given access to an established business model, as well as assistance organising and managing their business, and in return they pay a franchise fee to the franchisor.
Franchising is a well-established and recognised way of doing business in Australia, employing more than 590,000 people and providing an estimated annual sales turnover of $182 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.
Understanding your likely costs is an important part of planning your franchise business and will determine the type and size of financing you need. According to Griffith University's most recent Franchising Australia report, the average total startup cost for a new retail franchise unit was $287,500, compared to $59,750 for a non-retail franchise, but costs can range from $5,000 to over $1 million.
What to keep in mind when getting finance for your franchise
The amount you need to borrow. As the startup 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, and lenders will have certain limits on how much you can borrow. Some franchisors also require that you use a certain level of your own equity when buying a franchise and will not approve your franchise if it's completely funded by business finance.
Funds to cover additional costs. In addition to startup 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. So while your loan may cover your initial franchise fees, you will also need to budget for these additional costs to avoid cash flow issues down the line.
The loan term. When applying for a business loan for your franchise, you may be able to link it to the length of the franchise agreement term. This means that terms typically range from 5 to 10 years, but longer terms are generally available for borrowers who offer their residential property as security for the loan.
Allows you to draw from an account balance up to an approved limit.
Usually used to provide working capital for your business.
Usually secured by a residential property mortgage.
Access the funds you need at any time (as long as you don’t exceed the approved limit).
Competitive interest rates.
No minimum monthly repayment required.
Application, line and ongoing fees apply.
Can put your property at risk if you fail to make repayments.
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're able to offer a residential property as security, before beginning a franchise loan application. Without equity to your name, you may not be approved for a loan to buy a franchise.
Does the franchise have a financing option? Vendor financing is where the franchisor offers 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.
Bank accreditation. Some well-established and reputable franchise systems have bank accreditations. This means that because the banks know they're lending you money to buy a business based on a successful model, they'll be willing to lend to you generally 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's 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 you're 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 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.
Tim Falk is a writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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