Banks tend to follow a fairly standard template when deciding whether to offer finance to an individual for a franchise. Before they investigate the proposed franchise operation, they will usually want to assess the applicant’s suitability as a borrower. Besides wanting to know how much of their own money the applicant is planning to invest in the franchise, the bank will also require information about the individual’s credit history, career, skills, qualifications and, above all, their aptitude to run a successful franchise business.
A financial institution would normally expect an individual to fund at least 30 percent of the initial cost of the proposed franchise from their own resources. It will require detailed proposals of exactly how the money will be allocated and will also need to be satisfied about the viability of the franchise over time. A bank is likely to be more positive about offering financial assistance to someone taking on a franchise with a proven track record than they would be for a new previously untried franchise format.
The bank’s prime concern is always that the borrower will be able to repay the loan on the terms agreed. The borrower’s business plan, particularly the cash flow forecasts will have a major influence on the amount of money that can be borrowed and on the repayment terms offered. Realistic sales projections will go a long way towards persuading a lender that a particular franchise operation has the potential to become a successful enterprise.
Banks are not charitable organisations, so they will require security against any sizeable loan. Loans may be secured against life insurance policies, shares or other assets, but the reality for most borrowers is that their house is the only asset they own that will offer sufficient collateral to satisfy the lender.
Banks tend to use standard criteria when assessing requests for franchise finance;
banks will not normally fund more than 70 percent of the initial cost of a franchise;
banks are more likely to offer funding for franchises that have proved successful for other franchisees.