Funding a business can be a challenge in any economic climate and can seem even more daunting for the first time business owner. What’s more is that the tough part only starts after you’ve secured capital for your venture. Managing money can be far more challenging than getting your hands on it; many small businesses in the UK close shop in the first few years due to financial difficulty.
This reality speaks to the importance of financial prudence when entering the business world and franchisees are by no means exempt. And while the franchise business model does enjoy some level of preference from banks and lending institutions, how you use borrowed money is another matter altogether. With that said, use the advice in this article to secure and allocate your capital wisely.
How much do you need to start your business?
This depends on how capital-dependent your business will be, so your first port of call is to assess your upfront capital requirements as well as your running costs. Running costs should typically be calculated for up to a minimum of three months to ensure that the lights stay on for the foreseeable future.
And it doesn’t matter if you’re a work from home freelancer with minimal requirements like rent and internet connectivity – if your business depends on it, calculate it as a cost and make sure you’ve provisioned for it. As a franchisee, your costs may include an initial franchise fee, training fees, rent, shop-fitting costs, transport costs, stock, equipment and ongoing marketing expenses.
While startup costs may vary from franchisor to franchisor, you will ultimately have to avail capital to start up. So make sure that you accurately map out the capital you’ll need to start and run your franchise for the first few months.
Where to secure finance for your franchise
Your financing options will depend on your current financial health and history. A blighted credit record can make it difficult to secure a startup loan or an overdraft facility so take stock of your financial health. If your record does bar you from securing a loan or facility from a bank, consider a sponsor who will stand as surety against a loan.
Let’s take a look at avenues you can pursue to secure funding for your franchise:
Self-funding your business is undoubtedly the best position to be in as an aspiring business owner. Not only does it make you independent from debtors, but it also frees you from the interest that comes with loans. If you have any savings put away, consider using it before approaching anyone for credit.
Expecting others to put money down on your business before you do isn’t exactly the best way to start a company. Assuming you’ve done your homework and are ready to take the risk, break open the piggy bank and put your own cash down before expecting others to.
There are both fixed and variable rate loans available that you can pay off over an agreed period. With a fixed rate loan, you pay back what you borrow over a set period of time and your repayments stay the same. A variable rate loan comes with an interest rate that fluctuates, meaning the amount you’ll repay each month will vary depending on the current interest rate.
Banks in the UK are favourable to franchises and offer special loans to applicants in industries that are known to do well. And due to the popularity of franchising in the current climate, franchisees have a range of financial plans on offer from various high street banks. Make sure to check out the full range of options available.
Securing a grant
It is estimated that over £100 million in grants are issued to UK small businesses each year. While not the easiest to secure, grants do have some attractive benefits such as low interest rates and flexible terms for the borrower.
If you’re willing to put up with some paperwork and put a decent proposal and business plan together, then a grant may just be the right option for you. Grants are supplied by a wide-range of governmental organisations so be on the lookout and act fast because competition to secure one can be quite tough.
Overdrafts and credit cards
An overdraft or credit card can be a good option if you are able to commit to a higher interest rate and are comfortable with shorter term lending. Take caution to not become dependent on your overdraft or credit card and use your funds for the business only.
A potential pitfall is that these facilities increase over time and the temptation to spend more than what you need can get the better of you. Be frugal and an overdraft or credit card might just be the ideal piggy bank to dip into when needed.
Community Development Finance Institutions
There are many independent organisations that come together with the purpose to aid local communities in creating wealth. To this end, they provide individuals and small businesses with finance in the form of loans. These loans can act as working capital to kick start your venture and can also be allocated to specific areas of the business. Each of these organisations cater for different types of businesses or industries, so take time to research the opportunities that apply to your chosen niche.
A relatively new trend is to crowdfund a business, idea or cause. If your business idea gets the attention and buy-in from enough people then you might just raise enough funds to startup and cover your foreseeable running costs. Also known as peer-to-peer lending, there are sites specifically setup to hear business pitches from aspiring entrepreneurs, and if you nail it, you might just walk away with a wealthy investor backing you. You can also choose your investors based on criteria like the cheapest interest rates and repayment terms.
Make sure to keep your head above water
The ways you can secure funding for your franchise are varied and if you take your time to weigh up your options, you’ll get through the runway period in one piece. However, as with most things when starting a business, research and preparation are key to making the best decision for you and the future of your business. If running a tutoring centre is something you’re considering as a franchise business, then talk to us about the opportunities to join the Boost Education family of franchisees.