Finance for a retail franchise
Want to buy a retail franchise? Find out how franchises work and how to finance one today.
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If you're looking to open a retail business but don't have much experience, a franchise option can help give you the support you need. Whether you want to buy a franchise or start a new one, it's important to understand how franchises work and what you'll need to do.
Use our guide to learn how to get finance for your franchise and compare your options below.
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What is a retail franchise?
A retail business is one that offers goods or services to customers, whether that's through a brick and mortar store, online or a combination of the two. Retail incorporates businesses that sell anything from food and clothing, to equipment, technology and homewares. A retail franchise is one that allows you to open or buy a retail store under the umbrella of the franchise brand. In return for paying franchise fees, you're assisted in setting up and starting your retail franchise, and also receive ongoing training and marketing support.
There are many Australian retail franchises available, including:
- Hairhouse Warehouse
- Total Tools
- Clark Rubber
You don't generally need any business experience to apply for a retail franchise. It can therefore be a suitable option for someone looking to open a retail store but who lacks the necessary experience of running a successful business.
The application process for buying a retail franchise will vary based on the specific franchise, so it's worth checking with the franchisor to see how you can apply and what else is required as part of the process.
How much does a retail franchise cost?
There are a number of factors that will determine how much it costs to buy and run a retail franchise, including:
- The size and location of the franchise
- The retail industry of the franchise
- The type of franchise
While the exact costs of buying a franchise will vary based on the factors above, there are some general costs you need to consider when looking at retail franchise opportunities.
- Franchise fee. A franchise fee is what you pay to the franchisor for the right to use the brand name, trademarks and other intellectual property associated with the company. Typical franchise fees for retail stores are around $25,000 but can be upwards of $500,000 depending on the scale of the retail franchise.
- Franchise fit-out and equipment. This will vary depending on the size of the store and the complexity of the fit-out, such as whether you'll need expensive equipment. While the fit-out is often included as part of the franchise fee and organised by the franchisor, you may be able to source your own equipment or fit-out, depending on the franchise.
- Ongoing fees. Some retail franchises charge monthly or annual fees to be paid in order to cover training, marketing or other costs.
- Royalties. These will usually be calculated as a percentage of your total turnover or can be fixed at a set amount for the term.
What other costs do I need to consider?
Along with the initial costs of buying a franchise, there are additional operational costs that you will need to budget for. These include:
- Working capital. You need to take into account the costs of running the business when thinking about how much it will cost. Depending on the reputation of the business, it may take a while to build up a customer base in the area you establish your retail store in. While you're building up your business, you still need to pay suppliers, employees and yourself as well as continue to order stock and maintain the store. Look into the average set-up time for the retail business you're considering purchasing to help determine how much working capital you may need.
- Legal costs. Depending on the franchise, you may be responsible for the legal costs associated with buying the franchise. Check this before you enter into discussions to purchase the franchise.
- Insurance. The cost of business insurance may not be included in the price of the franchise and is therefore an additional cost you will need to consider.
- GST. You will likely need to pay goods and services tax (GST) on the purchase of your franchise. You will recover this cost when you lodge your business activity statement (BAS), but you will need to consider that you will be out of pocket for this amount until this happens.
How profitable is a franchise in the retail sector?
This will vary significantly based on the retail franchise you want to buy, as well as how successfully you can run the business. Before you buy a particular franchise, you should do your due diligence and look at the performance of a typical franchise store and, if possible, compare it to a range of other retail franchises.
One of the most important questions you need to ask is how long it will take you to see a return on your investment (ROI), so you understand your potential costs and find a suitable finance option. Generally, the larger the initial investment, the longer it will take to get an ROI.
According to Franchise Business, this can be a rough guide to your ROI:
- Businesses < $100,000: ROI 12 to 24 months
- Businesses $180,000 – $400,000: ROI in 2.5 to 3.5 years
- Businesses $500,000 – $850,000: ROI in 4 years approximately
- Businesses > $1 million: ROI in 5+ years
How can I finance a retail franchise?
There are a few ways you can consider financing your retail franchise:
- Unsecured business loan. This is one of the most common ways to finance a business. Unsecured business loans are harder to come by from major banks, but there are a number of smaller lenders offering unsecured finance. You'll generally be able to apply for between $5,000 and $500,000 and you'll have up to 2 years to repay.
- Secured business loan. You can also choose to attach either a personal or business asset to take out a secured business loan. You will need residential or commercial property as security, but will generally have more options to consider and are likely to be offered a lower interest rate.
- Business line of credit. If you're not sure how much you need to borrow or want to have continued access to funds down the track, you may want to consider a business line of credit. These loans give you a maximum credit limit that you can draw up to. There are no fixed repayments and the repayment term is ongoing.
- Peer-to-peer business loan. A peer-to-peer business loan involves the lender acting as an intermediary and connecting you to investors that are willing to lend you funds. You may find you're eligible for a lower rate or more funds with a peer-to-peer business lender.
What should I consider when comparing my financing options?
When comparing your options and finding the right finance option for you, there are a few things to keep in mind:
- How much can you afford to repay? When determining the repayments you can afford, remember to take into account the franchise costs you will be charged along with the working capital you will require to keep the business going. Think about the size of the franchise business and get advice from the franchise company on how long it will take to see an ROI to determine the level of repayments you can afford.
- Term loan or line of credit. If you're unsure of how much you need to borrow or just want to have continued access to credit, you may want to consider a line of credit business loan. This will let you draw down on funds up to a certain limit. If you know how much you need to borrow and want more-structured repayments, then a term loan is right for you.
- Security. Do you have a residential or commercial property you're able to offer as security? This will give you access to a wider range of business financing options and may help you get approved.
- The success and reputation of the franchise. As you're establishing a new business using the franchise name, the lender will rely on the performance of other franchise stores to see if it's a good decision to lend to you. Make sure you do your due diligence in getting as much information as possible from the franchise company to support your business loan application.
How do I get approved for finance?
Here is what you need to know about the application process for retail franchise finance:
- Eligibility. Go through the minimum eligibility criteria set by the lender to ensure you can meet it. This may include being a certain age and having a certain amount of business experience. The business itself may also need to meet certain criteria. If you're uncertain about any criteria, you should contact the lender directly.
- Franchise performance. The application process may require you to provide financial forecasts or the performance of other stores that are part of the franchise. If you're setting up a new store, you will need to provide a business plan, but if you're buying an existing location, you can provide the financials of the current franchisees including business tax returns, profit and loss statements and business bank statements.
- Buying into a successful franchise can help you set up your retail business quickly.
- Take into account upfront franchise costs and ongoing fees or royalties.
- How long will it take to get an ROI?
- You have a variety of business financing options.
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