If you’re interested in running a franchise business, securing a franchise loan may be easier than you think. Because of the relative security of franchise businesses compared to independent companies, many banks are more comfortable lending to franchises.
Learn what’s involved in a franchise loan and how you can qualify for a loan you’re happy with.
What Is a Franchise Loan?
When someone wants to purchase a local store or restaurant from a franchiser, they’ll take out a franchise loan from the bank. With this type of loan, one of the most important factors is the value of the franchise business. This value is based on the bank’s valuation, not on what the franchiser says it’s worth.
The loan is then secured against this value, at least in part.
How Do Franchise Loans Compare to Business Loans?
You’ll find the same loan features with franchise loans as you’d get with a standard business loan. The commercial interest rates are also the same.
Where franchise loans and business loans differ is in the level of risk. Franchise loans present less risk to lenders so they’ll be more flexible when it comes to the size of your security you’ll need to qualify. With financing for franchises, banks will let you borrow more of the loan against the business.
What Can You Pay for with a Franchise Loan?
Another difference with franchise loans is what borrowers use them for. Where a business may apply for financing to cover a wide variety of costs like new capital, technology, marketing, labour, operational costs, or anything to help the business grow, franchise loans are used primarily for a smaller set of expenses like:
- Franchise fees
- Purchases of stock or other business assets
- Training costs
- The lease for the store location
Because elements like brand reputation, the trademark, and the system for doing business already exist, you won’t need to cover these expenses. If you were starting from scratch with an independent business venture, you would be responsible for many more costs.
How Much Can You Borrow with a Franchise Loan?
Because you can partially secure the business against the value of the franchise, you can borrow more than you would be able to with a standard business loan or a home loan.
- If the store location already exists, you’ll be able to borrow up to 70% of the Loan to Value Ratio (LVR).
- For a new store, you can borrow up to 65% LVR.
- If you’re also securing the loan with a residential property, you may be able to borrow as much as 100% LVR.
Depending on how much equity you have, you may also be able to refinance your mortgage to a cheaper rate if you plan on using your home as a security. This will help you to lower your mortgage repayments.
This can get a little complex, however – by talking to an independent financial advisor or your accountant, you can make informed choices when figuring out which financial moves to take.
We can help you get a better rate on your franchise loan and guide you through the process. Call us today on (07) 3146 5732 or contact us online to speak with one of our loan specialists.
What Are the Benefits of Buying a Franchise?
With a franchise, the business model already exists – and it works. That means, as long as you have the expertise to run a business in your niche, you’re buying a system that makes money. Research and development, changing the products or services, establishing how to train your employees – it’s all already set up for you.
- Your brand is already established and trusted by consumers.
- The franchiser usually offers support in key areas like marketing and staff training.
- Relationships with suppliers and distributors are already established, which usually includes discounted costs thanks to the franchise system’s buying power.
What Are the Risks of Buying a Franchise?
The biggest risk may be the cost itself. Buying a franchise can easily cost $300k-$500k, or more, depending on the location of the store and the franchiser. There will also be ongoing fees as part of your franchise agreement. Once you enter into a franchise agreement and have your loan, you are taking on a lot of financial responsibility. Also, there’s no guarantee your store will be successful.
Another factor to keep in mind with franchise businesses is that you don’t have the freedom to run the business your way. For example, you can’t start selling a new product or change the way your store looks without getting approval from the franchise’s head office, even if you believe these decisions would make the franchise more successful.
How Do Banks View Franchise Loans?
Banks view franchise loans as a lower risk than other types of business loans. Statistically, you’re more likely to earn a profit year after year as a franchise owner than you would if you were running an independent business. This is why it’s a lot easier to qualify for a loan, and you can take out an even larger facility without the need to use your house or another property as a security.
Banks are even more willing to lend franchise loans if the franchiser is a well-established business with a proven franchise model such as Coffee Club or Poolwerx. Proven business models usually translate into stable profits for you, and to on-time loan repayments for your lender.
As long as the franchiser has been in business for several years, and the last couple years of the franchise business has yielded steadily increasing profits, you’ll probably be able to qualify for an attractive loan product. Your own credit history will of course be taken into account, but as long as you don’t have any credit issues or other financing red flags, you should find the process relatively easy.
How Do Franchise Loan Terms Work?
One noteworthy distinction with franchise loans is the term. Standard business loans can be set for 20 or 30 years, or longer. Unless you are securing the loan with a property, franchise loans are tied to the term of the franchise agreement, which is usually between 5 and 10 years.
Can You Get a Franchise Loan with Bad Credit?
Although it can be easier to qualify for a franchise loan rather than a standard business loan because of the greater security, you will still need to have good credit. There aren’t a lot of options for non-traditional borrowers when it comes to franchise financing. Generally, low doc loans and bad credit loans aren’t available.
Can You Get a Loan for Most Australian Franchises?
When you apply for a franchise loan, you won’t get the green light unless the franchise is on the lender’s approved list. Most established, successful franchises are acceptable. Newer franchises, which may be cheaper to buy than established ones, may also be the ones your lender doesn’t include on its list of approved franchises, as they are less well known in the market.
Here are some of the franchises we can help you get approved for:
- Bakers Delight
- Soul Origin
- Mrs. Fields
- Gloria Jean’s
- Mad Mex
- Boost Juice
- Coffee Club
Tips for Qualifying for a Franchise Loan
Before a lender will approve your application, they’ll want to verify a few things. Here’s what you’ll need to have prepared before you’re likely to qualify:
- Experience in the industry of the franchise. For example, to get a loan to help you become a franchisee for Coffee Club, the lender may require you to have 2 to 4 years in a managerial role at a café.
- A business plan, demonstrating how you intend to use your resources to run a successful store and showing your cash flow projections.
- Financial information related to the existing store, including profit and loss statements, business bank statements, and business tax returns.
Ultimately, a lender will need to see that you have the necessary skills to run a business in your franchise’s niche. They also want to know that the franchise business can comfortably earn enough so you won’t have any trouble servicing the loan.
What Do Banks Look for When Evaluating Franchises?
Lenders routinely review and appraise their list of approved franchises. This is something to keep in mind as each lender will have their own list, and each list of qualified franchises can change periodically.
What banks are looking for is stability, market relevance, and a proven business model. This is measured across the following metrics;
- Number of stores. The franchise itself should be robust. Lenders prefer franchises that are steadily growing and that already have more than a couple of dozen stores.
- Financial health and goals. The bank will look at the franchise’s financial key performance indicators, or KPIs.
- Market relevance. A franchise that was popular five or ten years ago may have already passed its peak. For example, if there is too much market competition for that particular niche or if consumer trends have changed.
If there is any reason a franchise starts to lose its trajectory of success, whether it’s negative press or a retiring CEO, banks may take a franchise off their list. Lenders will always gravitate towards the least amount of risk possible.
Not sure which lender to apply for to get a loan for the franchise you are interested in? Our experienced loan specialists have years of experience with franchise loans and all types of commercial lending. Contact us today online or call us on (07) 3146 5732.
What Can You Do to Get the Most Out of Buying a Franchise?
Purchasing a franchise is a big decision. Take the time to make sure this is the right decision for you and that you are ready to run a store and bring in healthy profits!
1. You can take a franchise business course to learn more about what it will be like running a store and what you’ll be responsible for as the owner. With a franchise, you may be getting a ‘pre-made’ business but you still have to wear all the many hats of a business owner, from hiring workers and excelling at customer service to being a leader and managing all the facets of your store.
2. Talk to other franchisees. Before making a commitment, talk to as many current and former franchisees as possible. You’ll find contact details of franchisees with your franchise agreement. They can offer you advice and invaluable insight about what it’s like running a store in your particular niche.
3. Have a legal professional look over your agreement. You can have different franchises send you their franchise kit, which will include the agreement. Look over every detail yourself. For the franchise you choose, be sure to seek legal advice as well. A solicitor can look through the terms and make sure you know exactly what you are signing up for. One thing that’s critical to find out is how you can get out of the franchise agreement if necessary. Whether your life has changed, or the franchise experience turned out to be completely different than you expected, it may not be easy to leave the agreement, at least not as quickly as you want to. You may have to find a buyer for your franchise. Make sure you understand what the rules are across all these eventualities.
4. Talk to a financial professional to help you determine if you are capable of investing in a franchise. It can also help to discuss your plans with a business advisor to evaluate how profitable the actual franchise you purchase may be in your specific location. Keep in mind, just because a franchise’s stores, on average, have a high turnover, it doesn’t mean you’ll have the same experience. Something as simple as an inopportune location or above average competition in your area could make earning healthy profits a challenge.
How to Apply for a Franchise Loan
When you’ve found the right franchise for you – the one that suits your skills and that you believe can be successful in your store’s location – you’ll want to think about financing your purchase.
Buying a franchise can be exciting. We’ll help you through the process of finding the right lender and getting a competitive franchise loan that you can qualify for. Call Nexus Money today on (07) 3146 5732 or contact us online to get started.