MAKING FRANCHISE FUNDING SIMPLE

Owning a business is a dream for many, an opportunity to build something meaningful, gain independence, and create long-term value. While some entrepreneurs successfully take that leap, others find themselves held back by one of the most common challenges, which is securing funding. Whether you are buying your first business or expanding your existing portfolio, understanding your funding options and building the right support team can make the journey far more achievable.

This journey becomes even more accessible when investing in a well-established franchise. Franchising provides a structured pathway into business ownership, offering a proven model, strong brand recognition, and ongoing operational support. These elements can significantly reduce the risks compared to launching an independent venture. However, long term success still depends on thoughtful planning, sound financial management, and the guidance of trusted professionals such as specialist bankers, franchise accountants, legal advisors, and industry experts who understand the unique needs of franchise businesses.

Understanding franchise lending

Franchise lending differs significantly from traditional business lending. Banks evaluate not only the financials of the individual applicant but also the strength and credibility of the franchise system itself. Key factors include the franchise brand’s reputation, operational systems and the training and support provided by the franchisor.

This is particularly beneficial for first time business owners who may not have direct experience in the industry. When purchasing a franchise, banks often view applications favourably due to the structured training and ongoing support provided by most franchise systems. These elements help mitigate the risks associated with limited prior experience and build confidence in the franchisee’s ability to succeed.

If you’re setting up a greenfield site (a new location with no trading history), securing funding can be challenging because there’s no historical data to validate your forecasts and demonstrate the viability of your proposal. However, specialist franchise bankers can leverage benchmark data from existing outlets to assess your projections more confidently and support your funding application more effectively.

Funding options for franchisees

Secured Loans:

Many franchisees choose to use home equity to fund their business, as it often offers longer loan terms and lower interest rates. This strategy is only possible if you have sufficient equity in your property. For banks, it’s a relatively straightforward option, as the loan is secured against your property.

However, with the recent downturn in the housing market, many homeowners may not have enough equity to cover the full cost of their business project. In such cases, banks may structure funding using projected business cash flow and franchise benchmarks to assess viability and support the application more effectively.

Cash Flow Loans:

These business loans are often secured against the business itself using a General Security Agreement (GSA). Banks may fund up to a percentage of the setup cost or purchase price based on the cash flow of the business, reducing the upfront contribution required from you. This can be a key advantage of joining a franchise system, as it may enable you to access funding for a larger or more strategic business opportunity than would otherwise be possible.

Other Loan options:

In addition to the funding solutions discussed above, there are several other loan options available to support your franchise business. These include asset finance, vehicle finance, rental bonds or bank guarantees, bridging finance facilities, and business overdrafts. Each serves a distinct purpose, so it’s important to discuss your funding needs with your accountant and your banker to determine the most suitable structure and ensure the loan term aligns with the nature of the expense.

For example, using the cash flow or overdraft facility to purchase long-term assets may place unnecessary strain on your working capital. In such cases, a term loan or equipment finance facility matched to the lifespan of the asset would be more appropriate, helping maintain healthy cash flow while enabling business growth. This is where your accountant’s advice becomes invaluable. While your banking partner can help structure the right solution, your accountant ensures it aligns with your broader business goals and financial strategy.

Planning for growth

If you’re considering expansion, it’s important to start planning early. Most franchisors actively support growth opportunities for successful franchisees who are already thriving within the system and have a strong understanding of the business model. Multi-unit ownership offers significant advantages compared to operating a single unit, but it also requires substantial capital.

A specialist banker may be able to leverage the equity in your existing business to help fund the new venture, potentially reducing the need for additional capital. This is subject to the profitability and performance of both your current and proposed businesses and provided you meet the bank’s lending criteria.

Refinancing: more than just rates

Refinancing isn’t just about chasing a lower interest rate. It’s about aligning with a bank that understands franchising and can support your growth strategy. Before switching banks, consider these factors to ensure the move benefits your business beyond short-term incentives.

Final thoughts

Franchising offers a solid foundation for business ownership, combining the advantages of a proven model, brand recognition, and ongoing operational support. However, success in franchising is not guaranteed by the franchise system alone, it requires strategic financial planning, legal safeguards, and a funding structure aligned with your business goals.

To navigate this journey effectively, it’s crucial to build a team of experienced professionals, including specialist accountants, franchise lawyers, and a banking partner who understands the franchise model. With the right team and a clear strategy, you can turn your dream of owning a franchise into a thriving reality.  

Sujam Ratnayake is a highly experienced Franchise Relationship Manager for Westpac. Contact the Westpac Franchise Team on 0800 177 007 or Email: franchising@westpac.co.nz

See this advertorial on page 34 of Franchise New Zealand magazine Year 34 Issue 4

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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.