A QUESTION OF FUNDING

Buying a franchise can be one of the most rewarding ways to enter business ownership. With a proven model, brand recognition, and support from the franchisor, franchise businesses offer a level of security and structure that independent start ups often lack. But while the franchise model reduces some risks, funding the business still requires careful planning, smart questions, and professional advice. 

In our Autumn issue published earlier this year, Westpac’s national franchising manager Daniel Cloete suggested some useful questions to ask about a business in order to become an educated franchise buyer. Now, Daniel focuses on how to turn your dreams into reality by looking in more detail at the right questions you should ask about funding that business.

As a business banker working with franchise buyers, I’ve seen first hand how asking the right questions can make the difference between a thriving business and a financial struggle. Here’s what you need to know – and ask – before committing your money to a franchise.

Start with the right mindset

Before diving into numbers, it’s important to shift your mindset. The first question is not, “How much can I borrow?” but rather, “How much can the business afford while delivering a decent living and return on my investment?”

This question sets the tone for responsible borrowing. Overextending yourself financially can lead to stress, underperformance, and missed goals. Instead, aim for a funding structure that supports both the business and your lifestyle.

Understand the total investment

Franchise advertisements often list a wide range of capital requirements – say, $90,000 to $250,000 – but what does that include? Ask:

• Does the figure include the franchise fee?
• Is the fit-out of a new outlet covered?
• Are rental bonds, stock, equipment, legal and accounting fees included?
• Is this the total investment or just the cash equity required?

Understanding the full cost helps you avoid surprises and ensures you’re budgeting accurately. Work with a franchise-savvy accountant to break down these costs and build realistic cash flow projections.

Don’t overlook working capital

Working capital is the lifeblood of your business. It’s the cash needed to cover day-to-day expenses like wages, utilities, and inventory before the business starts generating income. Ask:

• How much working capital will I need to operate effectively?
• How long will it take before the business becomes cash-flow positive?
• What contingencies are in place if revenue takes longer to ramp up?

Many franchise buyers underestimate this need, leading to early cash crunches. Your accountant can help you model different scenarios to ensure you’re prepared.

Explore cash flow lending

If you’re buying into a well-established franchise system with a strong brand and proven performance, you may be eligible for cash flow lending. This type of funding allows you to borrow against the future earnings of the business, potentially reducing your upfront equity requirement. Ask:

• Is cash flow lending available for this franchise system?
• What are the criteria for qualifying?
• How does this affect my debt servicing obligations?

Cash flow lending can be a powerful tool, but it must be matched with realistic projections and a solid understanding of the business’s earning potential.

Match funding to assets

Not all funding is created equal. Short-term loans may be suitable for working capital, but not for long-term assets like fit-outs or equipment. Ask:

• What is the appropriate term for each type of funding?
• When will major assets need to be replaced or upgraded?
• Will I need additional funding for future refurbishments?

Aligning loan terms with asset lifespans helps maintain healthy cash flow and avoids refinancing headaches down the road.

Choose the right funding partner

Your bank should be more than just a lender – it should be a strategic partner. Many banks have specialist franchise divisions that understand the nuances of franchise systems and can offer tailored solutions. Ask:

• Does my bank have a franchise specialist team?
• Are they familiar with the franchise system I’m buying into?
• Can they offer benchmarking data and strategic insights?

If your bank isn’t familiar with the franchise, they’ll require more detailed information from the franchisor. A knowledgeable banker can streamline the process and offer better terms.

Think beyond the loan

While initial lending is important, don’t forget about your ongoing banking needs. These services directly impact your bottom line and operational efficiency. Ask:

• What transactional services are available (e.g., EFTPOS, credit card facilities, online banking)?
• Are there overdraft options or flexible account structures?
• Can the bank support my growth plans with scalable solutions?

A good banking setup supports your business day-to-day and grows with you over time.

What will the bank require?

When assessing your funding application, the bank will look at many of the same factors you and your accountant are reviewing during due diligence. Expect to provide:

• A detailed breakdown of the total purchase price and funding requirement
• Financial statements and projections for the next 12 months
• Your personal statement of position (assets and liabilities)
• Information about the franchise system, including brand strength and financial benchmarks

The bank will assess your debt servicing ability, taking into account your personal financial position and the projected performance of the business. Transparency and preparation are key – be honest and open with your advisors and banker.

Ask, ask, ask...

Never feel guilty for asking lots of questions. Your accountant and banker deal with clients at all levels of experience. They won’t know what you don’t know unless you ask:

• What funding structures are available?
• What are the risks and benefits of each?
• What assumptions are built into the financial projections?
• What happens if those assumptions don’t hold?

Your job is to be fully informed. Your money, livelihood, and future are at stake. The more questions you ask, the better your decisions will be.

Additional tips for franchise buyers

To round out your funding strategy, consider these additional points:

Review the Franchise Disclosure Document: This contains vital financial and operational information.

Talk to Existing Franchisees: They can offer real-world insights into costs, earnings, and challenges.

Understand the Franchise Agreement: Legal advice is essential to understand your obligations and rights.

Plan for the Unexpected: Build a buffer into your funding to cover delays, cost overruns, or slow revenue starts.

Think Long-Term: Consider how the business fits into your personal and financial goals over five to ten years.

Final thoughts

Funding a franchise business is more than securing a loan – it’s about building a foundation for long-term success. By asking the right questions, seeking expert advice, and understanding the financial realities of your chosen franchise, you’ll be better equipped to make smart, confident decisions.

Remember, franchising offers a unique opportunity to own a business with support and structure. But like any investment, it requires diligence, planning, and a clear-eyed view of the numbers. With the right approach, you can turn your franchise dream into a profitable reality.  

See this advertorial on page 28 of Franchise New Zealand magazine Year 34 Issue 3

For more information and advice on buying a franchise get your FREE copy of Franchise New Zealand magazine. 

The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.