Q&As

Q: How much of my personal funds should I use to start a franchise?

 

CATHRYN HAYES
Head of franchising, HSBC
A: The first step is to establish how much of your personal funds you can afford to invest in the business. Have you any savings or can family help? For an established franchise, most of the major banks will lend up to 70 per cent of the start-up costs, for new franchises the figure will probably be around 50 to 60 per cent.

There are a number of costs to be taken into account, depending on the type of franchise. As well as the initial franchise fee, you may need to purchase a liveried van or stock. A retail franchise will incur the cost of leasing premises and any refurbishment as well as shop front, branding, fixtures and fittings. If employing staff, there may be recruitment costs. There will also be marketing costs to launch the business.

Working capital will also be required, so estimate what you’ll need to live on before the business generates cash flow and profits. It is important to consider the financial implications carefully before buying a franchise. You are entering into a long-term commitment and need to get the finance right at the outset. Don’t do it on a shoestring, but don’t borrow more than you can afford to repay.

 

PETER WILLIAMS
Franchise consultant
A: I am assuming you are in the healthy situation of having funding available for a good proportion of the setting up costs.

Possibly, depending on the particular franchise you are considering, you could even opt to pay entirely from your existing resources.

In practice, however, the majority of franchisees become established by means of a financing package and therefore it would be prudent for you to have an exploratory meeting with one or more of the major banks’ franchise lending managers in order to find out what they can offer. Gaining an understanding as to the availability of a business loan, should you want it, will further assist you in financial decision making.

My general advice with regard to financing arrangements is that one should always keep some liquid capital in reserve. Having funds readily available, upon which to draw as and when required, has to be a preferred position at any time – especially when starting out in business when provision for contingencies is strongly recommended.

Another pertinent issue to consider is the comprehensiveness of your budget. In addition to assessing costs relating to the initial franchise fee, equipment, stock and so on, ensure you also provide for adequate working capital to carry you through to the point at which you aim to become cash-flow efficient. Without knowing the actual figures applicable in this case, I have not been able to give a specific answer to your question; but hopefully these observations will help in leading you towards the right conclusion.