When exploring the finances required for a new franchise people will often only look at what the total investment is for the franchise purchase, many will forget to include working capital, ongoing fees and VAT. Clearly defining the correct amount of working capital required for any new franchise is crucial to its success. If you don’t have enough funds from the outset, then the start-up phase and ongoing future of the business could be a struggle.
In order to identify the total investment and the working capital needed a business plan is required. There are 3 key reasons why a business plan is needed:
- It should clearly identify the investment needed and predicted profit of the business.
- It can form a key part of finance application paperwork.
- The plan will allow you to monitor performance and manage your business moving forward.
Ensuring your business plan is accurate is crucial to your success in securing finance for your new franchise. Here at NGI, we have often seen people approach lenders directly only to be rejected, not due to them being financially suitable but simply because the plan is not right from the lenders perspective.
Any finance application will require a clear and presentable business plan which answers the exact questions a lender will want. Starting with an executive summary, providing a concise over of the business, its future potential and any funding requirements. It will identify the key personnel of the business along with their career history. Both these elements are important because any lender will need to perform a credit check on the business owner(s). On top of this a lender will want to see any personal assets (such as investments and savings) along with any liabilities (such as mortgages, loans and credit cards). A lender will be very interested in any household expenditure to ensure income can cover this whilst also ensuring you can afford to pay all business expenses during the start-up and growth stages. If the income is coming from the new business, then this clearly needs to be identified in the financial projections of the business plan.
Other areas to be incorporated in the business plan are information about the franchisor, its business model, what training and support is available along with their plans for marketing.
Lenders will look closely at the total investment required for the franchise, detailing how much is coming from you and how much is needed from the lender. They will be very interested in the financial forecasts, to include profit and loss, cashflow forecast and a forecast balance sheet. The profit and loss projections will demonstrate the trading activity of the business, sales revenue, costs and the profit to be expected. The cashflow forecast will identify the incoming investment required, set-up costs, ongoing transactions and VAT charges. Simply put, it will be a forecast of what your business bank account will look like at the end of each calendar month.
Of course, everything is based on projections and it can be difficult to predict what will happen in real life. Having the right amount of cashflow to accommodate for the peaks and the troughs is critical, especially at the critical start-up phase. Setting the amount of capital is important and also accommodating an overdraft facility should always be considered. Of course, investing in a franchise should take some of the uncertainty out of the equation, after all the franchisor has been through the process, completed a pilot operation and tested exactly what is needed. This is a key reason why lending to franchisees can be favourable, a lender has a proven business model to compare and evaluate. Having the ability to reference the financial performance of a similar business can offer great credibility to any potential lender.
Finally, always remember that you don’t have to be a specialist in all areas of business. It is important in the early stages of a business start-up to engage with the right resources so you can focus on what you do best. If you have any questions with regards to raising business finance or need some help with business planning, then the NGI Franchise Funding will be happy to help. Feel free to call us on 01993 706403 or e-mail firstname.lastname@example.org.