It’s a common practice for first time franchise owners to take out a loan to cover the initial costs of purchasing the franchise. It can be a time of uncertainty and anticipation and this article explores the process of helping you understand what to expect when looking to secure a loan.
How Do Franchise Loans Work and How Much Can I Borrow?
A franchise loan is similar to a business loan with interest rates and features. The difference is that a financier may be more likely to entertain your proposal than if you were to buy a non-franchised business in the same industry. This is because a bank might take more comfort knowing the system you are planning to join has operational and proven disciplines which require following. The amount which may be finally approved will depend on several things and these are discussed below.
Getting Your Bank ‘On-Side’
There are certain criteria that banks are looking for when it comes to approving franchises for loans. These can include, among others, depending on the lender:
- How long the business has been operating.
- The last 2-3 years business financials showing profits steadily increasing year-on-year.
- Your work/business experience
- Your ability to secure a loan
If you have a previous relationship with a business bank this can also be advantageous as small business loan applications can take some months from initial application to loan approval/decline.
What Are Banks Looking For?
There are no specific franchise brands preferred by banks – a bank will be enthusiastic if you can show them:
- Your ability to demonstrate the strength of your business plan
- How you plan to grow and develop the business into the future
- What assets you have to back up your application
Reputation: The public’s opinion and exposure matter. Your business plan can show the online review ratings. Be aware customers are suspicious of all 4.5 to 5.0 star reviews. The reality is, even the most successful business has a mix of review comments. Sleepy’s current overall review rating is sitting at 4.8 however, even Sleepy’s has a mix of reviews and you can check these for yourself and be ready to discuss them at an interview with your bank or finance representative.
Reviewing your Key Performance Indicators (KPI’s): Your Franchisor will have a range of KPI’s to monitor and develop the business performance and, they should all be available to you to develop and support your business plan. A bank will want to study these carefully and, may want to discuss them as they form a key part of the history and future of the business. Your contact in the Franchisor’s business will help you fully understand these KPI’s.
What are the Terms and Features of a Franchise Loan?
The term of your lease needs to be long enough to give a bank the confidence you will be able to repay the loan during this time. If you require a longer period it will, in all likelihood, necessary to negotiate an option period on the lease if possible. If your financial resources are such that you don’t require this and, your business plan clearly shows you can cover the debt in the required time, you will need to show your bank via your business plan you are able to meet the payment period.
How Do I Get Approved?
Finance approvals depend entirely on your relationship with the bank, the strength of your business plan, your asset backing and your financial resources and, your ability to demonstrate your ability to improve the business.
Find out more about Sleepy’s latest franchising opportunities