Banks favour franchising
Graeme Jones explains why banks favour franchising as a business proposition
Starting up a business by way of a franchise is growing in popularity. People from all kinds of backgrounds and circumstances decide to enter franchising, and have a myriad of reasons for doing so. But what is the attitude of the banks to this type of enterprise?
Start-ups and franchising
The UK sees the creation of thousands of new business start-ups every year – a very important opportunity for the banks. As well as many new start-ups there will also be a high number of young businesses that, for a variety of reasons, will cease to trade. The advantages that franchises bring may help to mitigate the threats that new businesses face during the early, yet critical, trading period.
So, what is the appeal of franchising from a bank’s perspective?Banks appreciate the advantages that an established and ethically-run franchise can deliver:
• Potential franchisees are screened carefully – and in some cases undergo very detailed training – before the franchisor agrees to license them
• Franchisors give support at the pre-start-up and start-up stages of the business and a support service level that is generally maintained throughout the term of the franchise agreement
• A franchise is a proven business model – that is to say other people with no or limited experience of starting-up and running a business will have succeeded as franchisees. The franchisor has developed a tried-and-tested business model. Although there is no such thing as 100 per cent guarantee of success, in
comparison with other types of start-ups, the level of closures sufferedby franchisees is relatively low
• Lenders understand the costs involvedin starting-up and will be able to advise on a good business plan, drawing on their experience of working with existing franchisees that bank with them
• The advantages of an established brand and the inbuilt marketing power of a franchised business bestow a readymade profi le that other small businesses would struggle to achieve
• The systems that the franchisee adopts may include controls and reporting, which could enable the bank to obtain timely and accurate information on how the franchise is performing
• Research and development is largely carried out by head offi ce, therefore franchisees can focus on developing their business in the knowledge that the overall future direction of the business is
looked after
• Franchisees themselves have normally carried out a high level of research and due diligence in order to establish the suitability of the franchise in which they are investing
What are the capital-raising benefi ts to franchising for the franchisee?
• Banks with a good understanding of franchising will have a dedicated franchise team making the whole process of raising bank fi nance and opening an account more straightforward
• The amount of fi nance that the bank may provide could be higher than that offered to a non-franchise start-up depending on the track record of the franchise
• There may be other related banking products which are offered on special terms to franchisees
The most important thing is that you fully research the franchises that you are interested in. Make sure that they are well run and done so on an ethical basis. Also determine whether you can work
with the franchisor and that you will enjoy the challenge – starting up any business, franchised or not, is hard work!
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