Finding the Funds

Even the best ideas need finance to get them off the ground, which makes it essential for aspiring franchisees to understand what banks are looking for as well as what they are offering, wirtes Paul Golden.

Just because franchises can demonstrate a proven business model, it does not make them infallible. The success rate may be far higher than for stand alone start-ups, but there are always going to be failures. This is an important factor to consider when you seek financial support. Regardless of your relationship with your existing bank, any personal contacts you might have or indeed the track record of the franchise you are hoping to buy, you should never view any application for funding as a fait accompli. This means applying the same rigour to your submission to the bank as you would to your research into which franchise is the right one for you. Lenders will always want to lend money regardless of the economic environment, but in the current climate it makes sense to present as strong a case as possible. You should also look at how each lender is perceived by its business customers, particularly small businesses. Some banks are more small-business friendly than others and while lending rates tend to be uniform, there may be packages that are suitable for specific types of businesses.

If possible talk to other franchisees about where they sourced their funding and what they were offered. At the same time, don't be blinded by the introductory offers. For example, free banking for six months might sound

tempting, but not if you end up paying above-average fees when the honeymoon period is over. Check the small print and get a feel for the kind of people you will be dealing with - if you need a bit of help to get you over a sticky period, these are the people you really need to have on your side. So what do the banks expect from

potential franchisees? Margaret Nolan, business manager with Bank of Ireland's specialist sectors division explained that a lender would expect a potential franchisee to provide a portion of the total investment costs as equity. This proportion can range from 30% for established franchises to 50% in the case of new franchises.

"The lending package can be a combination of asset finance, term debt and overdraft facilities. Bank of Ireland

Business Banking can fund up to 70 per cent of set-up costs for franchisees and the package can be a mix of all of the above products," she says. As potential franchisees are effectively start-up businesses, they can also avail of the Bank of Ireland Business Start-Up pack, which includes free current account fees for the first two years, business online (level 1 & 2) free for the first two years, the ability to borrow up to !200,000 through the small business loan package at competitive rates, no annual charge on Visa business cards for the first year and

reduced fees (50%) on invoice discounting. Franchisees can also avail of the Bank of Ireland developing business loan, which provides loan finance up to !25,000 at a preferential rate, unsecured. "This can be used for start-up fit out, to finance a fixed asset or for working capital," said Nolan. The maximum loan term in this case is

seven years and this product also has flexible repayments terms."When assessing a business proposal from

a potential franchisee, we would review the proposal in as much detail as any other business," she continued. The business plan should include:

● Detailed information regarding the

particular franchise/franchisor.

● Market and industry analysis - detailed

market research to support the proposal.

● Information on the competition and

how many similar businesses operate in the

market.

● Personal information about the applicant

and their own business background.

● Financial assessment - outlining the costs

of setting up, the applicants contribution,

how much they wish to borrow and what

security they have to offer, if any. A set of

financial projections, cash flow forecasts

and profit & loss projections should be

included.

Business assessment - is this a good business concept, tried and tested and proven by a profitable pilot operation? "Together with the detailed business plan, the lender will expect that the potential franchisee has done their homework, has a deep understanding of how the business works and is ambitious and enthusiastic about the concept," says Nolan. "It is also important that the potential franchisee has approached existing franchisees to ensure that a good franchisor/franchisee relationship exists. It is also vital that a well researched local marketing plan is in place to attract customers," she adds. Security can also be required by the bank, depending on the amount borrowed and  how much is being invested as equity. Ulster Bank has developed relationships with key franchises throughout Ireland over more than a quarter of a century, working with both master franchisors and franchisees. "Ulster Bank is very proactive with stand alone start-ups and start-ups within the

franchising sector," said Orna Stokes, the senior manager at the bank's specialist sector unit. Ulster Bank offers new franchises a borrowing rate as low as 4.95% for borrowings up to !70,000 (subject to lending terns and conditions) available up to September 2008. "The cost of setting up a franchise can vary substantially," she added. "Investments can range from thousands to hundreds of thousands of euro and anyone considering

setting up a business must go through the standard credit application process. However, our nationwide business banking units will assist the applicants to ensure the best possible deal can be negotiated on their behalf." Aside from financial support, Ulster Bank's business planning and advice brochures include a range of useful information to people starting out in business. As well as the obvious features such as online banking, chequebooks and competitive loan rates, it provides a local point of contact - an enterprise adviser - whose job it is to provide the customer with practical, relevant support in a range of areas as their business grows. "Ulster Bank has relationships with many of the leading franchises operating or planning to establish in the Irish market,"

continued Stokes. "We do not recommend any particular franchise, but we do recommend that prospective franchisees obtain independent legal and financial advice. Our preferred franchisors are well established, demonstrating a proven track record, provide effective training and support for franchisees and are full members of the British Franchise Association (BFA) and/or the Irish Franchise Association." Without going so far as to say that franchisees have a better chance of securing finance than ‘solo' applicants, she admitted that a franchises brand's track record and success can provide comfort. "While Ulster Bank is very active in its support of start ups of all types, a business under a proven franchise brand has been shown to reduce the likelihood of business failure." As for whether the credit crunch has made it harder for entrepreneurs to borrow money to invest in a new business, Stokes says well researched business ideas presented by dynamic, committed entrepreneurs who understand a personal contribution to the cost will be required will always be well received by banks. Given the current uncertainty facing the Irish economy it is inevitable that the credit crunch has focused the minds of entrepreneurs and banks alike. There is anecdotal evidence that debts are being ‘called in' at levels much lower than would have been the case even a year or two ago, although Adrian Moynihan, AIB business strategy manager, was keen to reassure those interested in becoming part of the franchise community that there is still

money available for new businesses. "On a global and industry level, the credit crunch has impacted both the

supply and cost of credit over the last number of months. However, adequate levels of finance remain available to support start-up business, which is evidenced by the significant levels of competition amongst business banks for start-up companies." The key to success in securing finance from a business bank, according to Moynihan, is to prove that the business can earn a return sufficient to repay the finance, keep the business trading and provide a profit/return to the entrepreneur or business promoter. "As franchisees are typically operating a proven business model and brand, this can reduce the risks involved in starting a business. Also, franchisees may have

greater access to previous/typical financial information from the franchisor, which can be used in generating financial projections. This may make it easier for banks to assess credit applications." AIB's business strategy manager referred to independent research by TNS MRBI to support his view that his bank does more business with franchisees than any other Irish institution. "The TNS MRBI research shows that AIB is the main banker for over four in every 10 businesses and we would estimate a similar share of the franchise market. Franchisees are a significant market for AIB." Franchisees can avail of a number of financial services, including two years free

banking on business current account transaction fees, a dedicated loan rate, six months free subscription to AIB's internet banking services and free first year membership of the Small Firms Association. This package is estimated to save start ups over E1500 in their first two years in business. "For any entrepreneur seeking finance to acquire a franchise we would typically look for a business plan, including financial projections both past (if available) and future," concluded Moynihan. "Including a brief CV of the business promoters is also recommended." In addition to free membership of the Small Firms Association for the first year, which includes access to a range of advice and information on business issues, AIB also has a range of business guides, tools

and information such as its ‘Guide to Franchising' and the ‘Starting your Own Business' guide, which includes a sample business plan template. If you are past the start-up phase it might be worth investigating Bank of Scotland's expansion fund for small to medium sized businesses as a source of finance. The fund, which is worth E500m, was established to support trading businesses that are looking to expand their operations in 2008. The fund is accessible to businesses both in Northern Ireland and the Republic of Ireland.

First published in Franchise Options Magazine© to order back issues please call 01 6611660