Franchise Loans
Franchising is big business in Australia, with over 28,973 active franchise units. Most up-and-coming entrepreneurs believe it is one of the best ways to enter a given industry. After all, there’s an already successful business model per franchise, and it comes with a tried and tested training and management system.
Stats show that Aussies prefer local franchise brands over foreign ones. Around 90% of the market is dominated by local names, and people support these shops. In fact, Australia has more franchising outlets per capita compared to neighboring New Zealand.
As franchising is very enticing, many seek financing for it. Let’s discuss what a franchise loan is, what financing options are available, and what factors you need to consider.
What is a franchise loan?
First off, let’s define what a franchise is. A franchise is any business where the owner (franchisor) sells their business name, logo, products, and overall model to a third-party entrepreneur (franchisee). The franchisee then has access to this established business model with staff training, supplies, and assistance when upholding the business standards. In return, the franchisee pays a premium fee to the franchisor.
Franchising is a popular avenue for entrepreneurs and investors in Australia, earning as much as $182 billion annually. Businesses appreciate the established nature of joining a franchise.
However, it can be costly because you need to spend for both operational expenses and the franchise fee. Studies show that the average start-up cost for a new retail franchise unit is $287,500, a hefty amount for many. The average rates for starting a franchise range from $60,000 to $1.2 million. This depends on what franchise you opt for, the sector, and the scale.
This is where franchise loans prove reliable. Franchise loans are secured against the value of the store, retail joint, or dining establishment. The main feature of a franchise loan that’s different from a standard business loan is that the loan term is tied to the length of the franchise agreement.
Lenders assess the franchise before approving; franchise lists can change in 6 months, depending on the market. Some well-trusted brands include Hog’s Breath Café, 7-Eleven, The Athlete’s Foot, Auto Barn, and Fernwood Fitness, to name a few. The lender and not the franchisor determine the market value. Hence, the franchise loan will be secured against the value of the store or restaurant that you are getting from a franchisor.
How much can I borrow?
The franchise loan covers fees, stock and supplies, training costs, and other brand assets. Lenders approve only the marketable brands and can offer heftier loans than other business loan types. But remember that you still need to present good working capital to prove that you can continue running the business in case of a market downturn or economic hardship.
Why do lenders offer franchise loans?
Banks and specialist lenders in Australia are often willing to offer franchise loans for several compelling reasons, including:
Established brand. Franchise businesses operate under established and well-known brand names that often hold a recognized and trusted reputation in their sector. Banks view these brands as assets that are lower risk than unknown businesses, because they have a set customer base, a proven concept, and the potential to generate revenue and meet financial repayment obligations.
Proven business model. Franchises, whether for food, tourism, tools, and services, operate on standardized and proven business models. This consistency enhances the predictability of revenue and operational success. Lenders are more comfortable in investing in a tested blueprint, reducing risk compared to untested ventures.
Support from the franchisor. Franchisors provide comprehensive support to franchises, including training, marketing, operational guidance, and ongoing mentorship. Lenders recognise that this support contributes to the franchisee’s success in managing the business, making financing them less risky.
Collateral and assets. Franchisees will automatically gain collateral through business assets – tangible and intangible- associated with the established brand. Lenders see this as another degree of security to assess the loan.
Reduced learning curve. Franchisees aren’t necessarily known to reinvent the wheel when it comes to revenue generation. So lenders have a degree of trust that the support system from the brand will result to the business operating efficiently.
Multiple revenue streams. Franchises usually offer different revenue streams – via product lines, progressive services, and cross-selling opportunities. These enhance the business’ debt-to-service coverage ratio and signify resiliency in case of market fluctuations and economic challenges.
How should I compare franchise loans?
When you’re in the process of comparing franchise loans and potential banks, it’s important to consider the following factors to make an informed decision:
Interest, fees, and comparison rates – Comparing interest rates is a good starting point to gauge loan competitiveness. However, it’s equally crucial to keep an eye on the comparison rate. The comparison rate provides a more comprehensive view by factoring in both interest and fees, giving you an accurate estimate of the total loan cost. Be wary of loans with low-interest but high ongoing fees, as these can significantly increase the overall loan expense. Balancing fees, interest rates, and comparison rates aids in identifying the most cost-effective loan option for you.
Loan term – Your loan term determines the repayment period for the loan. The duration of the term directly influences your monthly repayment amount. Opting for a shorter term often leads to higher monthly payments, and in the case of franchise loans, this could be too costly for a franchisee to manage due to the loan amount.
Loan amount – Lenders establish minimum and maximum loan amounts. Before proceeding, ensure that the lender offers the specific loan amount you require for your intended purpose.
Loan Features – Identify any desired loan features that align with your needs. Certain loans may offer early repayment options, penalty-free early exits, or redraw facilities. Review available loan features to ensure they cater to your preferences.
Turnaround time – Franchisees may need prompt financing once their franchise application is set. It’s best to evaluate the time the lender requires to approve the loan and transfer the funds to you. If your financial needs are time-sensitive, verify that they can accommodate your timeline.
Eligibility – While seemingly obvious, it’s crucial to only apply to lenders for which you meet all the eligibility criteria. This encompasses your financial situation, business plan, and credit history. Applying to lenders where you meet the prerequisites enhances your chances of a successful application.
Talk to us about franchise loans
If you need expert advice on franchise loans, we are inclined to assist every step of the way. Our decades of experience securing business loans and our veritable network of top Australian lenders make things easier for potential franchisees like you. Book your appointment today to get started.
