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If you find the perfect franchise opportunity and are eager to invest, you will likely need to consider financing options to cover the cost. Most franchise opportunities require significant investment. You will need to pay the franchisor the initial investment and be able to cover additional and unexpected expenses. This article will explain the cost of a franchise opportunity and what finance options are available to you so you can cover the costs associated with the franchise opportunity.
The Cost of a Franchise Opportunity
Franchising is an excellent way for entrepreneurs to start their own businesses. Franchise opportunities offer the safety of an established brand and the franchisor’s support. They cut out the need to grow a business from scratch and the risks that come along with newly launched brands. However, a franchise business comes at a substantial cost.
A franchisor will require that you pay an initial investment if you agree to join their franchise. Through this payment, you purchase the rights to operate under the franchised brand and for further aspects such as initial set-up costs and access to a comprehensive training package.
The British Franchise Association (BFA) found that the average cost of a franchise opportunity in the UK is around £40,000. However, the cost of a franchise opportunity varies. The total can depend on many factors, such as:
- set-up costs;
- business model;
- the industry the opportunity is in; and
- the products you will sell or the kind of services you will offer.
Self-funding is only an option for some prospective franchisees. Franchisees often seek finance to fund opportunities and to generate enough working capital. It is essential to factor working capital into your financial considerations. Working capital will be necessary, especially while you first establish and grow your business.
Franchise Opportunity Finance Options
1. Friends and Family
One option is to seek the support of your friends and family. You might not be able to cover the entire cost through this form of funding, but any contribution will bring you closer to your goal.
If your friends or family offer you money towards the franchise opportunity, ensure that you are both clear on the terms of your agreement. Drawing up a brief but clear contract with them is an excellent idea. It should stipulate the terms, including whether you will repay the money and how repayment will work.
2. Bank Loans
Bank loans are a traditional and typical financing option for prospective franchisees. You might take out a personal loan or a business loan. Some banks even offer specific franchise loans.
It is unlikely that a bank would offer you a loan to cover 100% of the initial costs. You will need to find additional finance or use personal resources to cover the remainder. But, you might choose to cover the bulk of the cost through loans.
Be clear about how much money you need and how you will use it before seeking a bank loan. Ensure you understand the payment terms and the personal and business implications of such debt. You will repay the loan regardless of whether your franchise is successful. As such, you should develop a clear repayment plan that aligns with your business plan.
3. Grants
Various organisations offer grants to entrepreneurs. You should research to see which grants might be available to you. You would not need to repay a grant. As a result, application processes can be competitive, but it is worth considering any available grants.
4. Crowdfunding
Crowdfunding is an alternative to traditional funding options. This funding option is a method of generating capital, typically online, from many investors. Each investor usually contributes a small amount of money, which goes into one larger pool of capital. Seeking this type of funding can be competitive. Moreover, a successful crowdfunding campaign often involves significant time investment.
There are various types of crowdfunding, including donation-based and equity-based. Donation-based crowdfunding involves investors providing the money as a donation, expecting nothing in return. Equity-based crowdfunding would mean giving your investors a small stake in your company in exchange for their investment. With any form of equity financing, you should understand the implications of giving away portions of ownership to others.
Discover the key legal and commercial issues to consider when buying a franchise.
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Key Takeaways
If you are considering investing in a franchise opportunity, it is worth conducting thorough research into the different finance options available. You will likely need to secure funding from multiple sources.
This article has discussed several financing options available to prospective franchisees such as yourself. These include the following:
- self-funding;
- funding from friends and family;
- bank loans (including personal and business loans);
- grants; and
- crowdfunding.
If you need help determining whether to join a particular franchise or understanding the implications of differing financing options, contact our experienced franchise lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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