Overview of Franchise Mortgages and Loans

It is one thing wanting to own your own business, but obtaining franchise mortgages or loans to finance the purchase of a ready-made business can be for some, a daunting prospect.

Fundamentally, a franchisee should have fully considered the implications of owning the franchise, not only financially, but also in their ability to conduct and bankroll the business, prior to entering into any formal agreements.

A significant proportion of franchisees require franchise loans to fund the purchase of their new business venture.

The extent to which external capitalisation is required depends on the type of franchise arrangement they are entering into, the strength and profitability of the franchise itself, and the applicants experience and documented business plans.

Sources of Franchise Loans

There are a number of different types of lenders that are potential sources of commercial finance who will fund the acquisition of a franchise, and so knowledge as to lender preference is essential if the applicant is not to lose valuable time and money in the long run in establishing funding during the acquisition stage of the process.

Funding may also be available closer to home, so family and friends may also be considered as sources of short term finance but make sure that you do not financially expose these partners to changes in their own future financial positions.

Note: To prevent franchisees from obtaining too many credit search stamps on their credit file (which can be viewed negatively by lenders), it is imperative to identify and approach only those lenders most willing to enter into franchise loan agreements.

High Street lenders will typically lend up to 70% of the franchise cost for experienced franchisees buying a known and credible franchise. First time franchisees, or people purchasing young or unknown franchises, may expect Banks to be unwilling to lend more than 50%.

Franchise Lending Conditions

In the latter period of 2007/early part of 2008 many lenders started to demand a higher degree of background information before offering franchise loans, and commercial finance in general.

Typically, a Franchisee will need to provide lenders with a significant amount of supporting documentation to be considered for franchise finance.

The Franchise Pack

Each Franchisor will have developed a legal pack which provides potential franchisees with all of the information necessary for them to make a professional assessment of the business opportunity.

Contained in the pack will be a history of the company, sales projections, technical and training requirements, and any other information deemed necessary to the franchisor.

The pack will also hold details of any ongoing charges levied on the franchisee for use of the corporate brand.

Lenders will want to see this information pack before offering franchise loans for the purchase of the business, or in some cases, the commercial premises.

Business Plans

Business plans will be requested. There are many sample documents available on the web and from most High Street lenders.

When developing a business plan, it is important to look at the business objectively, and of course, realistically. The plan will be scrutinised and so, its important to ensure that the data in your plan is realistic and credible.

If the franchise requires commercial premises the franchisee may wish to explore purchasing this outright.

Whilst it is not often mandated that the franchise owns the premises, in certain circumstances, and for certain businesses this may be preferable.

Purchasing Premises

Franchisees looking to explore this option should research the local market for suitable properties. Consideration should be given to:

For clients who do not meet High Street lending criteria, or do not have business plans and other supporting information, or who simply wish to obtain finance quickly, TAL Commercial has a portfolio of Self-Certified commercial mortgage products from an alternative set of leading commercial lenders.

These lenders are often competitive with High Street interest rates, and assess the loan application on the basis of the bricks and mortar value of the property, and not the status of the applicant or his company accounts.

Commercial Mortgage Lenders

Both self-certified and status based commercial mortgages are available to franchisees buying their premises.

You can find out more about these sources of commercial finance by following the links above.