A Franchise Loan is a funding provided by a bank based on the strength a Franchise’s proven brand, systems, and financial track record.
Often a Franchise must be ‘accredited’ with a bank for a loan to be issued. This allows Franchisees and Franchisors to access standard policies such as LVR, loan term and a better interest rate.
The capital outlay to start a popular franchise is often large, and a Franchise Loan helps raise funds outside of your personal contribution.
A Franchise Loan can be used to:
In addition to standard financial metrics, the bank will consider:
An Accredited Franchise is one which a bank has vetted as having a proven system and where the financial returns of the business can be estimated with some level of certainty. This allows the bank to attribute value and standard policies to the business even though it may not have started trading yet.
A list of franchises can be found on the Australian Franchise Registry – http://www.thefranchiseregistry.com.au/. However, not all franchises are bank accredited (the vast majority are not) and it is important to check as part of your loan application process.
Franchises which qualify for bank accreditation are typically businesses which transact in cash, carry no debtors, and require an initial investment of greater than $250,000 or more.
The benefits of becoming an accredited franchise are extensive. The primary benefit is that it provides a source of efficient funding to prospective franchisees, allowing the system to expand and scale quicker.
Other benefits provided by the bank include:
Your Franchise will need to hit a ‘critical mass’ and demonstrate to the bank that you have a proven system and your outlets have strong financial performance. The general steps to become accredited are:
During the due diligence and enquiry stage, the bank will be assessing:
For an accredited franchise that has a strong track record, the bank is much less likely to require property security. Instead, Franchise Loans are secured against the value of the particular store that is being set up or purchased. The market value of the franchise will be determined by the bank’s own valuation and not always that of the franchisor.
Nonetheless, providing property security will strengthen a deal and provide access to better terms such as a longer loan term and better interest rate. An unsecured Franchise Loan is subject to credit approval, and we will advise of this requirement during our assessment process.
Borrowers of a Franchise Loan can expect up to a 70% LVR for a strong accredited franchise.
For an unsecured (non-property backed) loan, the term is usually set to match the length of the lease, which can be up to 15 years. Where the loan is secured by property, it is possible to extend the loan term longer.
An interest only period may also be available for strong applications.