Financing a Franchise – Part 2 of 3
By Chris Ryan F. Fin.
This is the second part of my article series on financing a franchise. Please read Part 1 before continuing on below.
As discussed last week, the issues of financing a business can include:
- Fees,
- Interest Rates,
- Security,
- Term of Borrowing,
- Profit Projection and
- Working Capital.
This week, I’m going to discuss fees, interest rates, security and term of borrowing.
a. Fees
Banks will charge approval fees. This may vary between 0.6% to 1.2% of the sum borrowed. The primary commercial finance lenders will be the four majors (ANZ, CBA, NAB and WBC).
b. Interest Rates
In some cases, purchasers may have sufficient equity in residential land or home to be able to borrow for a business purchase on home loan rates. However, it is a monetary regulator directive for banks to seek commercial borrowing rates. This could be 2.0% to 4.0% above residential borrowing rates.
So the better prepared you are with your business plan and security options, the better result you may achieve. Franchises often benefit from interest rate concessions due to the relationship between the lender and the proven successful history of the franchise operation.
c. Security
You may have already considered the problem – “Will the equity in my home be enough to provide the bank with the necessary security?”
Whilst banks recognise the business you intend to purchase “has value”, the difficulty you face is convincing the lender to utilise that value towards the security needs of the borrowing proposal.
In some instances this may be possible but generally this is only with recognised commercial lenders. Again, franchise businesses provide the purchaser with an advantage.
With a “Franchise Business”, a lender may have a “Franchise Policy” which recognises the business as having a capacity to provide a percentage of the purchase price towards securing the borrowing need. This percentage may range from 40% to 70% depending on the franchise and the lending bank.
d. Term of Borrowing
Normally, the business will occupy leased premises. And in the case of a franchise, the head franchisor will have secured the lease for the franchise group and you will be offered a sub-lease. An important issue to remember is that the term of your borrowing could be linked directly to the remaining term of the lease.
This issue applies to both stand-alone businesses and franchises, albeit this is often relaxed with franchises. This is because landlords will generally favour a franchisor over a stand-alone operator.
There are sound reasons for this including -:
- The business may be reliant on the site of the premises to access the desired market segment. In the event the business lease expires and renewal is not available, the business may need to close and re-establish elsewhere. Cost of re-establishment on top of servicing remnant loan payments may create overwhelming strains on profitability and working capital.
- No suitable site may be available necessitating winding-up of the business, and with a remaining debt still to be serviced there will be no income stream to provide such servicing.
- You may be seen as a captive tenant at the expiration of the lease and the renewal terms offered bear no relationship to the expiring lease thus placing extreme stress on what was originally seen as a viable operation.
The moral of the story is to establish as many of the terms (rules of the game) for the period you will have a borrowing commitment.
This concludes part two. Next week will be the finale in my article series on financing a franchise – so stay tuned!
Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au
Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.
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