Buying into a franchise can be an extremely lucrative investment. Early adopters or purchasers of a well positioned franchise are often able to achieve strong financial returns by buying into a proven system for income generation. However, the initial capital outlay can be large – both in the set up and fit-out of the franchise, but also in the fees paid to the franchisor. A Franchise Loan can help finance these initial costs and lessen the burden on your own funds or assets.
What is a franchise loan?
A Franchise Loan is a funding provided by a bank based on the strength of 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.
What can a franchise loan be used for?
A Franchise Loan can be used to:
- Start or purchase a new location
- Fit-Out, refurbish or extend an outlet
- Purchase an existing franchise business
- Leverage off equity in an existing franchise business to purchase a new site
What are the bank’s main considerations to lend to me?
In addition to standard financial metrics, the bank will consider:
- Your professional background and experience e.g. do you have managerial experience overseeing a franchise?
- The particular franchise system you wish to buy into and its local and national presence
- The average turnover statistics of that franchise to establish it is financial viable and a proven model
- How long the business has been operating and the last 2-3 years financials if it is an existing franchise business
- The remaining term on the lease and the terms of the franchise agreement
- Your business plan for the franchise to ensure that it continues trading profitably and can meet its financial commitments
What is an accredited franchise?
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. 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.
What are the benefits of being an accredited franchise?
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:
- The ability to borrow up to 70% of the purchase price for an existing franchise or total set up costs of a new franchise – this includes all franchise fees, training costs, stock and business assets
- Less focus on the franchisee’s personal assets and no requirement to provide property as security, subject to credit approval
- Quicker and more streamlined loan assessment process
- Discounts and group deals for products and services e.g. overdraft facilities & transaction accounts, credit cards
- Access to banking platforms and technology such as online and electronic banking, and EFTPOS and payment solutions
If I am a franchisor, how do I become an accredited franchise?
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:
- Present to the bank the franchise system, structure, operating processes and financial returns
- Negotiate with the bank to structure a mutually agreed package for prospective franchisees
- Allow the bank to liaise with franchisees directly when applying for finance
- During the due diligence and enquiry stage, the bank will be assessing:
- The Franchise’s brand and reputation
- The profitability of existing outlets and the trade up period when starting
- The financial KPI’s set by the franchise system to monitor store performance
- The number of franchises – typically banks will only accredit franchise systems with 30 or more stores and locations
- The exposure that the bank already has to particular industries – if the bank is over-exposed to a particular sector they are less likely to accredit the franchise or will give it less favourable lending policies
Is property security needed for a franchise loan?
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.
What are the typical terms for a franchise loan?
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.