4 ways to finance your franchise purchase
“How will you finance your franchise?” This is a question you’ll need to address if you’re looking to buy into a franchise.
It doesn’t matter how much you are investing, you will need capital to start the business and enough money on hand to cover your operational costs until you have enough income.
Your capital will pay the initial franchise fee, buy any required equipment and fitout the location or vehicle.
As you do when buying a house, you’ll be expected to put some of your own money in, perhaps drawn from savings, shares or your mortgage repayments if you are ahead with these.
However franchise and finance expert Kate Groom warns against dipping into your superannuation.
“Super is to fund your retirement so don’t count this when you’re doing the maths on how much money you have available.”
Check out these funding options:
This has been a common route to funding a franchise purchase. With the Banking Royal Commission and Covid-19 the traditional banking route has become more challenging – but it’s still possible.
Expect to put up your home as security for the bank’s risk and ensure you present a comprehensive finance application.
Says Kate Groom “It will need to be supported by sound financial forecasts, evidence you will be able to repay the loan and your credentials for success in the business”.
Family or friends
If you’re short of money to fund your franchise, family money might help you over the line, she suggests.
“The bank of Mum and Dad is actually quite a common source of finance, especially for younger franchise owners.
“This source of finance has some big advantages. It usually comes with few strings attached, is easy to secure and repayments are likely to be flexible.
“Even so, we recommend that the loan arrangement is documented and the lenders kept up to date with the progress of the business. This can help avoid awkward Christmas and birthday celebrations!”
Funding from a friend can help too, but this needs to be a well-structured agreement so it’s crucial to get legal advice and ensure documentation is thorough.
“Redundancy packages are an appealing source of finance for a franchise as there won’t be loan repayments to make and there’s no interest charge,” says Groom.
It’s wise to seek advice on the best way to structure your finances though.
“Even if you have the cash on hand, there may be a good case for borrowing some of the money you need to get underway, for instance vehicle or equipment finance,” she adds.
An alternative way to finance equipment and vehicles is using asset finance where you take out a loan that’s secured on the equipment, vehicle or fitout.
There are specialists in each area, and this form of finance is generally quite easy to organise says Groom but there will be a cost to pay in terms of interest.
“With several different ways available to finance a franchise, it’s a good idea to discuss them with your franchise accountant before you put the money on the line. They can help you use different sources of capital in the most effective way. They can also advise you of any tax consequences of your decision so that there are no nasty surprises later.”