In the ever-expanding world of franchising, one critical factor that can make or break a franchisee's journey is access to franchise business loans. Banks and lenders are often the gatekeepers of capital, and successfully navigating this process is essential for franchisees. In this article, we explore 5 key strategies to help franchisors and franchisees secure franchise financing from banks or lenders.
Franchise Finance Tip 1: Build Relationships with Banks, Lenders & Brokers
To gain access to franchise loans, it's crucial for both franchisors and franchisees to establish strong connections with local banks, lenders, or an experienced commercial broker (preferably one with franchise lending experience). The more they know about you, and your business, the better.
Attend networking events, engage in local business communities, and be active in your franchise's corporate network. By building relationships early on, you not only gain valuable insights into bank/lender policies and processes, but also increase your chances of finding a financial partner willing to provide loans for franchises and invest in your success.
Franchise Finance Tip 2: Become Franchise Accredited with Banks
Franchise accreditation is a golden ticket to gaining the trust of banks and lenders and is typically saved for franchise’s with more than 30 locations (varies with each bank). When a franchise is accredited by a bank, it means that the financial institution has thoroughly vetted the business model (and continues to do so on an annual basis) and is more likely to lend to prospective franchisees. Being accredited demonstrates your commitment and, more importantly, reduces the risk in the eyes of the bank or lender.
Each bank has a very detailed credit lending policy, and these policies are what influences a banker or credit analyst to approve or decline a loan application. Being bank accredited provides further flexibility to these credit lending policies.
As an example, if establishing a new franchise location, a standard bank policy is for the loan applicant to contribute 50% of the required location start-up costs with equity (cash or property). However, if the franchise is bank accredited, this equity requirement may reduce to 30-35%.
Franchise Finance Tip 3: Franchisees, Approach Brokers/Banks Early
Timing is everything in the world of finance. Franchisees must understand that seeking franchise loans is not a last-minute endeavour. Approaching banks or brokers early in the franchise development process is crucial. Many franchisors waste time screening applicants and looking for site locations, only to be told that the potential franchisee doesn’t have the funds required to establish the new location.
By initiating discussions well in advance, franchisees can benefit from strategic advice, explore different financing options, and allow sufficient time for banks to evaluate the franchisee's suitability. Early engagement also allows for adjustments to information/documentation such as a Business Plan or Cash Flow Forecast if needed, increasing the likelihood of securing franchise funding.
Franchise Finance Tip 4: Understand Asset, Income, and Liability Positions to Avoid Surprises
Transparency is key when seeking franchise business loans. Franchisees (and the franchisor) should thoroughly evaluate their financial situation and provide accurate information to the bank or lender. This includes an assessment of assets, income, and liabilities. Being forthright about your financial position prevents unpleasant surprises during the application process.
A clear understanding of your financial situation also allows banks to offer tailored solutions that match your needs, ensuring a more successful partnership.
Franchise Finance Tip 5: Verify Cash Flow Forecasts and Business Plan Inputs With Franchise Data
Numbers matter. Franchisees should prepare a robust business plan supported by accurate financial data and analytics . Collaborate with the franchisor to verify cash flow forecasts and business plan inputs, this not only reassures the bank or lender but also aligns your business goals with the franchise's overall strategy.
Detailed financial information from the franchisor to support the franchisee’s application is critical and mandatory when the banks are reviewing location applications, especially potential greenfield (startup) scenarios.
Get Help From Specialist Franchise Finance Brokers
Gaining access to franchise financing is all about building trust. By building relationships, earning bank accreditation (if possible), approaching banks early, understanding your financial position, and supporting your data with franchise information, you are demonstrating your commitment and readiness for success.
Remember that securing financing is a journey, not a destination, and with the right approach, the path to your franchise dream can become a reality. If you’re committed to franchise success, our franchise advisory experts can help you achieve it. We offer franchise finance solutions , legal know-how, digital and marketing services, accounting and books, insurance and more. Yep, a true one-stop-shop for all things franchise!
