Franchises can be a great way to get into business. You’ve done your homework and now it is time to think about financing the new franchise business. Finance companies often see franchise businesses as more robust than many independent enterprises. Finance companies often have existing relationships with franchisors or are very open to looking at lending for franchise business.
You may be one of the minority of folks going into franchises with existing cash reserves, perhaps from a previous business, an estate or termination payment from an employer. If you are not, then a franchise loan may be just what you need.
What is a Franchisee Loan?
Franchise loans are typically secured against the value of the business you are looking to acquire. The business may be a store, an outlet, a service or a restaurant. When you apply to a finance company for a franchise loan, they will determine the market value of the franchise and decide what percentage of your required capital they are prepared to lend.
Franchise loans are usually advanced to cover franchise fees, stock, business assets and training, necessary to establish the business. The franchisee will be required to demonstrate that they have sufficient working capital and personal resources to get the franchise off the ground.
Getting a Franchisee Loan Approved
Financial institutions have lists of approved franchises they support. They will require more information about the specific opportunity you are interested in (especially cash flow, profitability and sales forecasts), and your personal circumstances. If your franchise is not on their approved list, they will still take a look at it.
In considering your loan application, the financial institution will need to be satisfied about the viability of the franchise and you capacity to run it successfully. They will look at your previous experience, especially any relating to success with a similar scale venture, and in a industry you have the ability to prosper in.
For an existing franchise, the bank will want to see a business plan and the financials of the enterprise for the past 2-3 years. This will include profit and loss statements, bank statements for the business, and tax returns.
If you are opening a new franchise, most of the information above will not exist. Financial institutions focus on your business plan in this case. Because there is no “actual” operating financial data to support the business case, they will look for more detail on cash flow and capacity estimates, whether you intend to supply some capital, any security you may have, and what resources will be available to make the business a financial success.
How does a Franchisee Loan Work?
Franchise loans are available to purchase new or existing franchises. Interest rates tend to be similar business loans, and they have similar loan features.
Banks and other lenders are very committed to franchise loans, due to the acceptable risk profile of successful franchises.
Once the financial institution has established you have what it takes to run the business, they will then determine what percentage they wish to lend you. The will consider criteria such as the strength of the franchise and your ability to operate it.
Another factor in the amount that will be offered is any security you can use. You may choose to use your home or another asset (that the lender finds acceptable) as security. If you secure the loan with your home, it is possible to get 100% of the purchase price of the franchise. Unsecured, it may be possible to borrow up to 70%. The financial institution will be more likely to lend at the upper end of these percentages where the franchise is an existing business with a good financial track record.
Franchisee Loan Options
In choosing a franchise, financial institutions are more confident lending for well-established franchise systems with great track records, and stable financial turnover that demonstrates the strength of the specific franchise business.
When considering various franchise options, be mindful of factors such as:
- how long the business has been operating
- financials from the last 2-3 years of the franchise business
- are profits steadily increasing year-on-year, or stable at a good rate for success (not decreasing)
- franchise loan terms and features
- loan flexibility, e.g. can you pay extra or increase the loan
- franchise loan terms are tied to the length of lease or the franchise agreement term, often making them shorter than a non-franchise business loan
- loan terms between 5 and 10 years are common, with property as security loan terms can be stretched to 25 to 30 years
- interest only loans are typically 2 years or more, usually only when offering property as security
- low doc and bad credit options are generally not available
Franchisee Loan Interest Rates and Fees
The main aspects of franchisee loans to consider are interest rate, any fees, loan flexibility and loans amount. Interest rates are usually around 5% to 9% but may vary. Fees vary from $0 to 2.5%.
Qualifying Criteria
General qualification criteria is as follows:
- Before talking with our expert team, it’s important to ensure you have all the necessary documents on hand. To start the application process, you will generally need to provide:
- your driver licence number
- details of the franchise you are interested in investing
- your business ABN (if you have one)
- the account number and BSB of your main business account (if you have one)
- we will need to look at the LVR (loan to value ratio) of the franchise and security (if available)
- we will need to check your credit history
How to Apply for a Franchisee Loan
Business and commercial finance can be complex, unlike residential home loans where loan features, interest rates and fees are easily accessible with a web search. We understand the complexities involved and will help steer you through the options using our business lending platform. The team at Mortgage World Australia is available to discuss your franchise opportunity, and to help you make the best choice for your business needs..
Franchisee Loan Tips and Considerations
There is a major difference between franchises and other businesses. Finance companies will generally lend more against the value of a franchise than they would for a non-franchise business (of a similar size and industry). One advantage of franchise loans can be, you may need a smaller deposit.
The amount of the loan will depend on the strength of the franchise. If the specific store or business you wish to purchase already exists, and has a good financial track record, the lender will be heartened by this.
When choosing a franchise, give serious consideration to your personal circumstances. Your financial position, training and career experiences may not prevent you from tackling a particular franchise, but they will influence the deal you can obtain from finance companies. Contacting Mortgage World Australia is a great first step to knowing what exciting possibilities are out there for you.
It is easy to underestimate the amount of capital you will need. When applying for a franchise loan, be careful to consider all costs.
When investigating a possible future as a franchisee, it is better to talk to us early in the process. Our expert staff can help you with the process. It takes time to gather documentation and prepare applications. We are here to help you.
Franchisee Loan FAQs
Do the term loans you offer require annual reviews?
Some financial institutions will review loans and request updated financial information annually. We do offer solutions that do not require annual reviews.
How long is the franchise loan term?
Franchise terms may be from 1 year to being granted in perpetuity. Generally, franchises are granted for 3 to 5 year terms, with an option to renew.
Do I need to supply security?
No. Financial companies will lend between 50% and 70% of the capital required on a franchise without security.