How you approach funding for a new business venture is critical to its success, with important considerations around working capital, loan security, cashflow forecasts and loan structure. If you are experienced in business you will be familiar with these requirements and the importance of a robust business plan.
However if you are new to business, this may feel a little daunting, especially if you are considering putting up your house as collateral on a business loan.
With the survival rate for new businesses sitting at around 41.5%, you are right to be cautious, however the significant rewards of owning a business will continue to attract new operators.
One way to potentially lower the risk is by buying into a reputable franchise with proven systems and processes to help you succeed. This may also increase your chances of securing funding due to some franchise brands having pre-approved accreditation with lenders.
Despite some of the negative publicity in the media over the years, Australia’s franchise sector is one of the most regulated in the world, according to Dan Toms. co-director of Franchise and SME Lending Specialists – CFI Finance.
While starting a franchise business does not guarantee success, partnering with the right brand may increase the likelihood of your business succeeding by helping you navigate the common pitfalls, and structure your business and finance for success.
Toms says that prospective franchisees should scrutinise the franchise disclosure document where they can see how many sites have ceased to trade over the last three years, along with franchisee contact details.
“Reach out to other franchisees to discuss their experience, ask what they like about the network and what they don’t,” he suggests.
How Funding a Franchise Differs
While lender finance products for franchises do not differ, many franchise brands have accreditations in place with banks and other lenders which provides streamlined access to funding, reduced paperwork, and often better interest rates, according to Toms.
Whatever the business you are planning, he says you should ensure you understand all the costs involved – also known as turnkey costs.
“People can overlook costs such as a landlord bond or bank guarantee, legal fees, stock and working capital,” he said, adding that other cost considerations include accounting, marketing, your shopfit, vehicles and business support.
The working capital you require will depend on the type of business and how long it takes to reach break even.
“Some businesses such as gyms that offer pre-sale memberships can be cashflow positive from day one. Other businesses take time for the marketing initiatives to take effect and a customer base to be built.”
“Any new business should also have a cashflow forecast with realistic expectations for sales and expenses. Most lenders will be able to provide you with a cashflow forecast template,” Toms said.
Securing Your Business Funding: “The 5 Cs of Credit”
Before committing to any franchise or lease agreement, Toms says you should first secure your funding with a loan availability period of around three months, which will give confidence to the applicant, franchisor and landlord.
“Funding your business is the most important step and will influence you entire business journey, and potentially mean the difference between success and failure,” Toms said.
He described the “5 Cs of Credit” that lenders will use as a baseline for whether they will approve your loan, and how much they are prepared to lend:
● Character: This refers to the applicant’s credit report and credit score. How likely is the applicant to repay the loan?
● Capacity: Can the proposed loan be serviced? Another reason why a cashflow forecast is required.
● Capital: What savings does the applicant/business have to put towards the project?
● Collateral: What security is available to secure the loan, such as equipment, property, or a guarantee from another entity.
● Conditions: Are there any market conditions that may affect the business? These can be macro such as the broader economy or more granular that only affect a particular brand, industry or location.
Types of Business Finance
“If a business is starting out then it is common that we would generally recommend a business loan,” Toms said, adding that CFI Finance also offer leases and cashflow lending.
“A business loan is a fixed term loan between three and five years where the interest rate is also fixed for the term of the loan. This type of loan also allows maximum flexibility on how funds are used, rather than lending being tied to equipment.”
Whatever business you start, due diligence around funding, finance and cashflow is critical. Ensure you have the buffer to ride through any troughs, and consider partnering with a reputable franchise to help you navigate the process.