Franchising is a popular business model, with over 1,300 franchise businesses in Australia alone. If you’re planning to buy a franchise, there are a number of costs you should consider. There are also a number of financing options available, including secured and unsecured business loans.
Key takeaways
- Franchise loans can help with both initial setup costs and ongoing expenses, making it easier to manage cash flow during the early stages of your franchise.These loans often have flexible repayment terms and can be secured by the business assets or the franchise itself.Lenders may require a detailed business plan and financial projections to assess the viability of the franchise before approval.
What is a franchise and how much does it cost?
A franchise is where the owners (the franchisors) sell their business name, logo and model to a third party (the franchisee). The franchisee is given access to an established business model, as well as assistance and training to manage their business. In return, they pay a franchise fee to the franchisor.
Franchising is a well-established and recognised way of doing business in Australia, employing more than 590,000 people and providing an estimated annual sales turnover of $182 billion. However, it can be costly, as there are both business operational costs and the franchise fee to consider. According to Griffith University’s 2016 Franchising Australia report, the average start-up cost for a new retail franchise unit was $287,500, compared to $59,750 in a non-retail franchise. This included an initial franchise fee of $31,500 in retailing, compared to $28,000 in non-retail franchises. That said, start-up costs, inclusive of franchise fees, inventories and training range from $2,500 to upwards of $1.2 million.
How can I become a franchisee?
If you’re thinking of becoming a franchisee, there are a number of steps you need to take. These include:
- Building franchise literacy. Get as much information about franchising and how it works as you can. You will then need to consider whether this type of business suits you, and if you can see yourself putting in the work required.
- Choose the industry and franchise. You should choose an industry and franchise that suits your skills. This can include retail trade, accommodation and food services, administration and support services, education and training, finance and insurance services, construction and other industries.
- Check if you meet the criteria. The franchisor may expect you to meet certain criteria. You may be expected to have specific skills, or a certain amount of deposit ready.
- Contact the franchisor. There may be preliminary interviews you’ll have to go through. Make sure you get as much detail about the business as possible from the franchisor. This includes information on your role, how much the royalties or fees are, minimum performance criteria, how much work is required and how much support you’ll receive. Make sure you cover operational questions, including training for yourself and staff and any marketing they provide. Also cover costs and expenses, income and supply. This should give you an idea of whether or not to proceed.
- Do due diligence. Speak to your accountant, advisors and lawyers with expertise in franchising.
- Once you decide to proceed, you’ll have an application form to fill out. This will begin the formal process. Get the disclosure document, franchise agreement and other documents. Go through these, do the due diligence, ask questions and speak to other franchisees.
- Get your finances ready. If you’re applying for finance, get the ball rolling. Contact the lender and begin the application process.
- Once you have finances confirmed and everything is in place, you can sign the franchise agreement.
What are the pros and cons of starting a franchise?
Pros
- Don’t have to build the brand from scratch. You’ll be relying on an existing brand name and won’t have to spend years building your brand.
- Advertising. In the same vein, your business will receive more advertising than it ever would if you started it yourself.
- Training. The franchisor will train you, sometimes at the start and on an ongoing basis. This training can include not merely how to make the product, but also how to manage the business side of things.
- An already established network. This includes a network of suppliers, as well as fittings and equipment. As part of this network, you’re likely to get better prices than you otherwise would.
- Support. There’s an existing network of support you can rely on. Franchises often have a team of people who can advise and assist you.
Cons
- Cost. Every business comes with costs, but with franchises, you will owe a percentage of your sales to the franchisor. This can eat into your profit margins.
- Risk. While you’ll be plugged into an existing brand ecosystem, there’s no saying how it will go. You need to do your research thoroughly to ensure you’re making the right decision.
- Restrictions. You will have to run the business as the franchisor says, and there may not be much room for deviation. You may find this difficult if you’re used to running things your way.
- Demands on the franchisee. You may have to meet certain requirements, such as working in the franchise for a number of months. This will depend on the franchise, but some franchises may expect it of you.
- Stress and difficulties. You may have to keep long hours, manage staff and maintain the standards expected by the franchisor. This can cause stress and make it a difficult venture.
- Lots of paperwork. There will be paperwork from the franchisor, and if you’re applying for a loan, from the lender.
What are the popular franchises I can buy?
There are a number of different types of franchises you can buy, across a range of industries. These include:
- Fast food franchises like McDonald’s and Domino’s
- Juice bars and bubble tea franchises like Boost and Gong Cha
- Health and fitness franchises like F45 Training
- Home service and repair franchises like Jims Group
How can I finance a franchise?
Depending on what you need the funds for, there are a number of business loans you can apply for. These include:
Secured business loan
This type of loan requires an asset as collateral. Residential or commercial property can be used. You could also secure it against your franchise and get a loan term limited to the length of the franchise agreement. Longer loan terms may be available if secured by residential property.
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Unsecured business loan
This loan does not require an asset as security. Borrowing amounts are lower, and loan terms can be limited to the length of the franchise agreement, around 5 to 10 years.
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Low-doc business loan
This loan is designed for borrowers who can’t provide the usual proof of income. Lower documentation is required for this loan.
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Business line of credit
With a line of credit you can borrow funds on an ongoing basis, as opposed to a single lump sum payment. This type of loan is usually used to provide working capital for your business. It can be either secured or unsecured.
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Finance from franchisor
Some franchisors offer their own finance arrangements to potential franchisees.
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What should I consider before applying for a franchise loan?
- The amount you need to borrow. How much you need to borrow will depend on the franchise you select and the industry it operates in. You will also have to consider how much the lender is likely to lend. Additionally, some franchisors require that you use a certain amount of your own equity when buying a franchise. They may not approve your application if it’s funded entirely with a loan.
- Additional finances. You’ll also need to cover additional costs, such as equipment, furniture and fixtures and business premises. Your loan may cover your initial franchise fees, but you will also need to figure out how you’ll pay for the rest to avoid cash flow issues down the line.
- Your financial situation and borrowing power. Lenders will take your personal financial situation into account. You will need to take stock of your assets and liabilities, as well as whether you're able to offer a residential property as security. Your credit history will also play a role in your ability to get finance.
- Other franchising options. Vendor financing is where the franchisor offers financial assistance to new franchisees. You then repay this financing in one of two ways: by paying a little extra on your regular royalty payments, or by exceeding a pre-agreed level of profits for your franchise. Vendor financing is becoming increasingly common in Australia, so it’s worth checking if this option is available. Be sure to compare the costs between vendor and debtor financing before applying for anything.
- Bank accreditation. Some well-established and reputable franchise systems have bank accreditations. If the franchise is accredited, the bank may be willing to lend up to 70% of the purchase price. This is because they know they're lending you money to buy a business based on a successful model.
- Advice from your accountant. Your accountant is the best person to advise you on whether you should proceed and how much you can afford to borrow. They can also help you figure out the best way to fund your franchise.
How can I compare franchise loans?
Here’s what you need to keep in mind when you’re comparing loans and lenders.
- Interest, fees and comparison rates. Comparing interest rates is a good way to check if the loan is competitive. But as important as it is to compare interest rates, you should also keep an eye on fees and the comparison rate. The latter takes into account interest and the fees you will be charged, and will give you an indication of the true cost of the loan. Some loans may come with low interest but high fees, so this will drive up the cost of your loan overall. Keeping an eye on fees, interest and the comparison rate can help you find a loan that’s low cost.
- Loan term. Your loan term is how long you have to repay the loan. The length of the term will affect how high your repayments are. That is, with a short term, you can expect higher monthly repayments, but with longer terms, you pay more in interest and fees. You can use a business loan calculator to get an idea of what your repayments will be with different loan terms.
- Loan amount. Lenders have set minimum and maximum lending amounts. Make sure the amount you need is on offer from the lender.
- Loan features. If there are specific loan features you would like to have, make sure to check which loans offer these features. This can include early repayments, early exit without penalty and redraw facilities.
- Turnaround time. Check how long the lender takes to approve the loan and transfer the funds to you. If you need your funds within a certain time, make sure the lender is able to accommodate this.
- Eligibility. This may seem obvious, but you should only apply to a lender if you meet all their criteria. This includes your finances and credit history.
How can I improve my chances of getting a franchise loan?
It may seem daunting, but there are a number of things you can do to improve your chances of approval. These include:
- A solid business plan. Work on a comprehensive business plan before applying for finance. You’ll have to provide a realistic and detailed plan for your business. Include market analysis, financial projections and how you will make a profit. This can help strengthen your case.
- Relevant experience. Do you have prior experience running a franchise or working in the same industry as the franchise you want to buy? Update your resume to highlight your relevant business experience. Provide written references from employers or employees. Having relevant experience reduces the lender’s risk of lending, making them more open to your application.
- Collateral. Offering collateral makes lending less risky and your application more attractive. Lenders are more likely to lend, and at lower interest rates. With collateral, your borrowing power increases.
- Investing your own money. Investing your own money in the business shows the lender that you’re serious about the franchise and will do what it takes to make it succeed. This can increase the lender’s confidence in you.
What will I need to apply for a franchise loan?
Before approaching a bank, it’s essential that you’re organised and have a clear plan. For help putting together a business loan application, contact a broker or ask your accountant for advice. To apply for a franchise loan, you may need to provide:
- Personal financials. This can include your personal tax returns and business financial records. You will also have to provide details on your other debts.
- Business plan. Have your accountant prepare a business plan including a profit forecast for your proposed franchise business.
- Relevant business experience. Highlight your relevant business experience to demonstrate that you know what you’re doing and can run the ship.
- Loan security. Substantial savings with no attached debt or sufficient equity in a residential property will put you in an excellent position to be approved for finance.
- Financials on existing franchise. If you wish to purchase an existing franchise, provide fully audited financial documents for the past 2 years, including profit and loss statements.
How can I apply for a franchise loan?
🤔 Work out what type of loan you can apply for, how much you need to borrow and what you can afford.
🔎 Start comparing lenders and loan products. Don't forget to compare interest rates, fees and eligibility criteria. You can use the comparison table on this page.
✅ Select a lender. Click “Go to site” to be directed to the lender’s page, or “More info” if you want to read about the lender.
🖨️ Organise and prepare the required documentation. This will make the application process easier.
📱 Apply. Most lenders have their applications online.
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