Franchise Finance

Starting a franchise can be a practical way to own a business, particularly if you want the backing of an established brand and a proven operating model.

A franchise typically involves purchasing the right to operate under an existing business, using its systems, processes, and support in exchange for an upfront fee and ongoing costs.

While this structure can mitigate some of the risks associated with starting from scratch, it still requires financial commitments that may need additional funding.

What is franchise finance?

Franchise finance is funding designed to help you buy into a franchise, cover setup costs, or support the business as it starts trading.

It usually comes in the form of a business loan, but it can also include other types of business finance depending on what you need and how quickly you need it.

Even though you’re joining an established brand, most franchises still require a significant upfront investment. That’s why many people starting a franchise use finance to spread costs over time, rather than using all of their cash in the beginning.

Why might you need franchise finance?

Most franchisees have a mix of upfront setup costs and ongoing running costs, and the total can vary depending on the brand, sector, and whether you’re taking on premises. Upfront costs you may need to budget for include:

• Initial franchise fee
• Training costs
• Legal fees
• Premises costs
• Fit-out and refurb costs
• Equipment or vehicles
• Opening stock and suppliers
• Launch marketing and advertising

It’s also worth planning for ongoing costs, such as royalties, marketing contributions, and overheads like wages, utilities, rent, and supplier payments.

Most new franchisees will also need working capital. Even with a strong brand behind you, it can take time for sales to build and for cash flow to settle. A buffer can help you cover early trading costs without putting pressure on the business.

Types of franchise funding

Every franchise has different costs, timelines, and cash flow pressures. That’s why the right type of franchise finance for one business might not be the right fit for another. Here are some of the most common options.

Unsecured business loans

Unsecured business loans don’t require you to put forward an asset as security. They can be a useful option if you want a straightforward loan for your franchise business, or if you don’t want to tie the borrowing to a property.

This type of funding can be used for a wide range of costs, including the franchise fee, working capital, marketing, staffing, stock, and setup expenses. Repayments are typically fixed, which can simplify budgeting and planning.

Secured business loans

Secured business loans use a UK property as security. Because there’s less risk for the lender, secured borrowing can sometimes be suitable if you’re borrowing more, need longer terms, or want to reduce the overall cost of finance.

This option can be useful to support a major investment, but it’s important to understand the risks if repayments aren’t maintained.

Asset finance

If your franchise requires equipment, machinery, or a vehicle to operate, asset finance can help you spread the cost over time, rather than paying the entire amount upfront.

In many cases, the asset being funded is linked to the agreement. That can make asset finance a practical choice for item-specific purchases, while keeping more cash available for running costs.

Revolving credit facility

A revolving credit facility works in a similar way to a business overdraft. You’re approved for a credit limit, and you can draw down funds, repay, and reuse them as needed.

This can be useful for managing cash flow gaps and short-term expenses, such as stock purchases, supplier payments, or seasonal fluctuations. Interest is typically charged on what you use, rather than the full credit limit.

Merchant cash advance

If your franchise processes a high volume of card payments, a merchant cash advance can provide access to funding based on your card sales volume.

Repayments are taken automatically as a percentage of your card takings, which means repayments can fluctuate in line with revenue. This can be helpful if your sales are seasonal, but you still need to understand the total cost and how it will impact your cash flow.