A guide to unsecured business finance for franchises
Franchises are viewed favourably when applying for finance through high street and other commercial lenders. With a tried and tested business model and a much lower failure rate than start up businesses, many lenders consider franchises a relatively low investment risk. However, there is a possibility that the application for finance will be turned down.
Lenders may refuse finance for a number of reasons, including a lack of assets that could be used as security, a poor credit history, or it may be unclear how the franchisee will repay the debt from their cashflow projections.
If the main reason for the rejection is lack of security there are other finance raising options that should be seriously considered, particularly unsecured business finance. Unsecured finance can take the form of grants and support schemes offered by local authorities, government or the EU, as well as soft loans and business awards.
This guide provides an introduction to the different forms of unsecured business finance available to franchises and discusses the key considerations that should be taken into account when applying for this type of funding.
Small Firms Loan Guarantee scheme
The Small Firms Loan Guarantee scheme provides an alternative funding route for franchisees that don’t have access to assets, such as commercial or residential property, that could be used as security against a traditional business bank loan.
Operated by the Department for Trade and Industry (DTI) and available from more than 20 high street banks and specialist commercial lenders, the scheme offers loans of up to £250,000 to franchisees that want to start up or expand their business.
However, while the DTI provides a guarantee on 75% of the loan, it is worth keeping in mind that this doesn’t guarantee a lender will approve an application. Eligibility for the scheme, for example, is restricted to those businesses that have been operating for five years or less. An existing business that has been operated as a franchise for more than five years may be ineligible for this type of funding and it may be necessary to find other forms of business finance.
The franchise should have a turn over of less than £5.6 million per year, and the franchisee will also be required to contribute some funds towards the project, whether it is the purchase of the franchise, leasing of premises or purchase of equipment. Typically the franchisee will need to contribute 30-50%.
In addition, a comprehensive business plan tailored specifically to the requirements of the scheme will need to be presented to the lender. A full three-year financial forecast comprising of profit and loss, balance sheet and cashflow forecasts should be included to maximise the chances of an application being successful.
Soft loans
If the franchise is ineligible for the Small Firms Loan Guarantee scheme or if this type of funding isn’t suitable, it may be worthwhile investigating the possibility of a soft loan.
A soft loan is another form of unsecured finance offered by local authorities and government agencies. The loans are often made available for businesses and franchises that have been turned down for finance by a high street bank or commercial lender.
Typically a soft loan will offer finance under £100,000, and it is worth keeping in mind that the interest rates and terms on a soft loan can often be better than those on other business bank loans.
The qualifying criteria for a soft loan will depend on the individual requirements of the loan organiser. Often the location of the business will have some bearing on the amount of finance available, and it may be possible to access additional funds if the franchise is to be operated in an assisted or disadvantaged area. It will be necessary to ensure the franchise meets the required criteria prior to submitting an application.
The local authority in the franchise area may have information on soft loans and schemes available for local businesses. DirectGov, for example, provides links to local authorities and government agencies across the UK.
Grants
Grants are often overlooked by new franchisees as a source of start up or expansion finance for their business. Many do not know about the range of grants available, and those that do may have no idea how to apply or may believe that franchises are not eligible.
While it is true that the qualifying criteria for some grants will exclude franchises from applying, there are other grant organisers that will consider awarding funding to franchised businesses. It can take some time to investigate which grants are suitable for this type of business and it may be worthwhile gaining advice from an independent intermediary on the grants and schemes best suited to franchises.
Start up and expansion grants are available through government agencies, local authorities, regional development associations and other business support organisations in each local area. These may be targeted towards a specific industry, such as art, technology or rural businesses, or may provide funding for certain types of projects, such as staff training, equipment purchase or research and development.
Grant funding can provide between 35 and 50% of the project costs, however it is important to note that many grant and scheme organisers will require proof that the franchisee has some funds already available for the project and isn’t relying solely on grant funding.
Awards
Business awards can provide prestige and promotional opportunities for franchises that have been up and running for a certain period of time. In addition, a number of awards offer winners and finalists a cash prize that could be put towards the day-to-day operation of the business. However, it is not wise to count on receiving any funds from these sources.
The application process
No matter what type of unsecured finance you plan to apply for, whether it is the Small Firms Loan Guarantee scheme, a soft loan, a grant or an award, it will be necessary to ensure you have a comprehensive business plan with appropriate financial forecasts that has been tailored to the requirements of each awarding body.
The business plan is one of the most important documents you will write during the application process as the information contained within it can be the deciding factor between whether you application for a grant or award is accepted or rejected.
As well as providing a clear and unbiased overview of your business market and the business metrics that the franchisor should have developed, a comprehensive three-year financial plan is necessary.
This will help the awarding bodies decide whether your franchise is worthy of receiving a loan, grant or award, and will provide them with some guidance on how you plan to use the finance to grow or start up your franchise.
Taking the next step
While there are a number of unsecured finance options available for franchises that have been refused a commercial loan or mortgage, many are not well publicised and it can take some detective work to seek out alternative funding solutions.
However, investing a small amount of time in researching these alternative finance solutions now can mean the difference between getting your franchise off the ground and being stuck without a finance solution.
Contact us to find out more about how The Diverse Finance Company can help you raise unsecured business finance or take advantage of other business finance solutions.
Copyright © 2006 The Diverse Finance Company
