To borrow or not to borrow? That is the question…
It is surprisingly common for a prospective franchisee with only just enough cash to use their personal savings to fund a franchise start up and not bother borrowing.
Why might an individual decide to do this? Maybe it’s because they don’t want to pay fees and interest, or because they don’t think the banks are lending, or perhaps it’s because they simply don’t want the ‘hassle’!
This is, in my opinion, likely to be a bad decision. It is widely recognised that the business world is changeable and often challenging to predict. A business may meet, exceed or fall below expected performance, its critical to be prepared for any outcome.
First, let’s examine what might happen if the business falls below expected performance.
During challenging times, it is possible that trading may not be as good as was originally anticipated. Therefore, the franchisee could start making losses and running out of cash. Approaching a lender at this point, when losses are being made and the business performance is miles off its planned projections, an application for finance will most likely prove unsuccessful.
It would be much better to request a loan at the outset, say for 50% of total start up costs, when everything looks promising and the business plan demonstrates viability. Consequently, when and if a problem occurs, there is a ‘safety net’ in place.
Now, lets look at an alternative perspective.
Things may be going really well for a franchisee. There may be no significant problems and the accounts may show decent profitability. The franchisee decides to expand and purchase a second territory. However, because the franchisee doesn’t have cash to spare, the decision is taken to approach a lender.
It is likely that in the current economic climate, lenders will require the applicant to put in some further ‘new’ money at that time, it is doubtful they would be willing to solely rely upon what is put in as personal contribution during the start – up period.
So, once again it would have been better to have borrowed at the beginning and kept some money back to assist with expansion plans when the owner (and not the lender) feels the time is right.
Ultimately, self – funding versus borrowing cash is not clear cut. If the level of savings a franchisee has access to are plentiful, then self – funding may well be the best option. My strong advice is to ensure there is a ‘safety net’. If having a safety net involves putting almost all of the franchisees savings on the line, I would suggest giving serious consideration to borrowed capital. After all, it is better to be safe than sorry as there really are no guarantees in business! Take a look here at a huge selection of business opportunities on Daltonsbusiness>>
Rob Orme QFP, Marketing Manager of Franchise Finance, is the author of this article. He is the youngest recipient of the bfa’s ‘Qualified Franchise Professional’ award. Franchise Finance provide a business planning and arranging finance service to franchisees and franchisors. They also have their own Business Training Academy, which delivers business and financial training to franchisees, franchisors and support staff. To find out more, email firstname.lastname@example.org, call 01844 355575 or visit www.franchisefinance.co.uk