🕒: Six minutes
The funding considerations when starting a franchise are perhaps the most essential element of undertaking such an opportunity. Franchising represents an incredible opportunity for you as an aspiring entrepreneur as it enables you to avail of a business model, brand equity and unparalleled training. However, the entry costs required may initially appear to be a significant barrier to entry. A common myth about franchising is that franchises are extremely expensive but in reality, the amount of investment required varies significantly.
Finances are still the fundamental determining factor of whether or not you can start a franchise. It is especially relevant when you consider that the minimum investment figure cited is not the total investment needed to run a franchise successfully. You should carefully consider each of the associated costs when considering starting a franchise business, particularly in the first three months of your start-up and, if possible, seek the advice of an accountant.
There are a number of funding support options for potential franchisees, each with their own advantages and you should consider each of the following possibilities to see which option, or combination of options, might suit you best.
1. Fund the franchise yourself
You may be in a position where you can afford the franchise fees outright. This is not a viable option for many franchisees but there are a number of individuals who can afford the right priced franchise opportunity, due to:
- Retirement funds - If you have a pension and/or retirement fund you may be able to afford the franchise fees of the business in which you are interested.
- Redundancy payment - if you have recently been made redundant, franchising offers you an excellent opportunity to re-enter the employment market in the industry of your choice, and your redundancy payment will help cover your investment fees.
- Savings and home equity – offering your home as collateral and combining this with savings was traditionally the standard means of funding a franchise. This remains a solid option for anybody who has a home with strong equity.
2. Take out a loan from a bank or a franchise funding company
A popular option for individuals who are not able to directly self-finance starting a franchise is to look to a lending organisation such as a bank or a franchise funding company for support. As long as you have carefully evaluated the reputation of this organisation, this is a secure and workable solution to your financing issues.
Companies specialising in franchise-related loans have increased in popularity throughout Europe and provide relevant and functional advice which is directly suited to your requirements. Whether you are looking to one of these organisations, a large bank or a credit union for consideration, you are more likely to succeed in your request, if you possess the following:
1. A good business plan
Without a solid and practical business plan, which concretely outlines your aims, your targets and your contingency plans, a reputable lending institution is unlikely to loan you money.
2. Strong credit history
A negative credit history can impact your likelihood of securing a loan or signing a lease for the franchise.
3. A history of saving
Most organisations will look for some evidence of your ability to save before allowing you to take out a loan.
3. Seek direct funding from the franchisor
Some franchisors offer direct funding to new franchisees in an effort to help them start their business. This may include a reduction in the amount of fees required or a loan to help cover the minimum investment. This reduction in your up-front costs will allow you more capital for growing your business in those crucial first months. This is something you should ask your potential franchise partner as early as possible.
They may also be able to direct you to applicable third-party funding or alternative sources of financing which are available to you as part of their own business agreements. Whatever arrangement you make with your franchisor, ensure that the terms of this agreement are explicitly stated in the final franchise agreement that you sign.
4. Alternative funding options
Beyond the traditional franchise funding options from savings to bank loans to franchisor support, there exist a wide variety of alternative funding opportunities which may be applicable to your specific requirements. These include:
- Taking out a personal loan from family and friends who may wish to support you in your franchising endeavour.
- Looking for grants specific to your personal profile e.g. the IFA has specific grants for women, minorities, veterans etc.
- Finding a business partner – the right business partner may be the answer to your question regarding financing. If you can find an individual who is looking for your skillset, you will be able to pool resources and raise the franchise fee.
Sourcing local or government funding or incentive programmes – in Europe there are a number of such incentive programmes aimed at aiding small business including:
- The COSME Programme – guarantees loans to small and medium-sized businesses.
- The InnovFin Programme – offers loans to innovative businesses.
- Creative Europe – grants loans to small and medium-sized businesses in creative industries.
- European Investment Bank and European Investment Fund – offers business loans and venture capital.