Many people like the idea of operating their own business, but lack the idea to get a new enterprise off the ground. This is where franchising can come in, with would-be entrepreneurs prepared to invest hundreds of thousands of pounds to run an established, tried-and-tested business concept. Some of the UK’s most successful franchisees will be polishing their entries this week to meet the deadline on Wednesday for the Franchisee of the Year awards, an event run by the British Franchising Association (BFA) to celebrate the best of the country’s 39,000 franchise businesses.
One thing that those entering this year’s awards will no doubt have in common is a struggle to find funding. First, there’s the investment in the franchise licence. This doesn’t necessarily run to six figures – though with big name operations like McDonalds and Domino’s Pizza it easily can – but would-be franchisees do usually need to find tens of thousands at the very minimum to invest upfront. Banks typically want a person to provide between a third and half of the cash themselves before they’ll even consider lending the rest. Then, the need for finance doesn’t stop there – like any business, franchises often have to borrow further money to cover start-up expenses such as advertising and purchasing stock, even before they’ve thought about how they might grow the business. Plus, that initial large outlay of cash for the franchise licence has often left the business owner with limited working capital. Whatever the sum needed – and for whatever purpose – many franchise owners have found that conventional lenders have been less willing to lend during the recent economic slump. Even established operations with a proven track record and evidence of good cash flow have reported that they’ve struggled to get the growth capital that they need.
Hard data about lending to franchises in the UK is difficult to find, but the International Franchise Association (IFA) commissioned a report into how the economic downturn had affected franchise lending in the US, which gives some indication of general credit trends related to these type of businesses. The study found:
- Lending had declined since 2008, with there being almost ten per cent less borrowing available for franchised firms than that needed.
- Demand for funding increased due to a growth in the number of franchises. The research points out that since more people have lost their jobs some have looked to invest their redundancy funds in a franchise. In other words, franchises have proved even more popular than usual against a negative economic backdrop.
- The shortfall in lending has restricted existing franchises’ growth, limiting businesses’ ability to take on new staff, and even causing some to pull in their horns and let employees go.
The irony is that franchises are a safer bet than untested businesses, and they have a better than average chance of making money. Almost half of British franchises report that they are either quite or very profitable, according to the latest annual survey from the BFA and NatWest, while 92 per cent say that they are at least marginally profitable. It’s something that we can attest to, having worked with many successful franchise businesses in Britain. Some of the big banks do have specialist franchise lending teams, but just as lending to SMEs across the board has been down during the economic crisis, we hear many franchisees say that their bank managers are keeping a tighter hold on the purse strings these days. Then there’s the time that arranging bank loans tends to take. When funding is sought, it has also not become unusual for the banks to want to look deep into an individual’s personal finances before they will agree to free up any borrowing for their business.
It probably doesn’t help that many franchises operate in the very sectors that are less popular with conventional lenders in any circumstances.
- About 65 per cent of franchised businesses are in the food and hospitality sectors, according to the IFA, including fast food restaurants, food retail, and lodging. The mainstream banks have never been too keen on these areas, as we’ve detailed on this blog in the past.
- A further 29 per cent work in service industries, such as commercial and residential repairs and maintenance, and business services.
- The IFA estimates that about six per cent of franchises are in real estate and automotive lines.
Franchises should take heart that funding for business growth is available, even if it’s not always immediately easy to find. Away from the high street banks, independent specialist franchising lenders do exist, and they understand franchising operations and their particular needs. Then, there are companies that focus on leasing arrangements, which also prove popular with franchisees that need to buy equipment or vehicles. And we’re glad to say that short-term lenders, like us here at Boost Capital, are another option to which franchisees are turning in greater numbers when they want to gain access to fast, hassle-free borrowing.
We believe that hard-working and ambitious franchisees should be able to achieve their growth ambitions. By definition, franchises are all about business expansion, and that’s what Boost Capital was established to nurture and facilitate. Not every franchise can be an award winner, but many are a great business success, and we hope to help as many franchisees achieve this goal as possible. Not to do so would be a great waste of potential – and of the best business talent of tomorrow.
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