Borrowing to Franchise in 2009

Cathryn Hayes, the head of HSBC franchise department, has just released her December e-news letter.  In the letter she discusses the banks franchise lending prospects for 2009.  I have posted the article below and provided a link to the article on the HSBC website.  This information is provided for the interest and benefit of anyone considering raising bank capital to buy a franchise in 2009.

In the article Cathryn outlines the banks position to lending to franchise buyers during the current economic down turn.  Cathryn’s advise can be useful to you as you prepare your business plan before presenting to the bank - Prospects for franchise lending in 2009. 

“There can be no denying that 2008 has been an extraordinary year! As it draws to a close, this is an ideal time to look at the prospects for your new and existing franchisees looking to obtain funding during the forthcoming year.

It is a fact that there is less bank funding available in the market than previously, but this doesn’t mean that all loan applications will simply be turned down. HSBC are still lending money to SMEs and are more likely to support a business with a well-researched and structured business plan, particularly those that demonstrate a strong understanding of their finances.

Franchising has a number of advantages here. Although not recession-proof, the wide spectrum of sectors covered by franchising means that the UK franchise industry is likely to fare better than conventional SMEs in these difficult times. The failure rate for franchises is much lower than for stand-alone start-ups. This is predominantly due to the support of the franchisor and other franchisees in the network, who can help new franchisees avoid the pitfalls associated with starting up a business. In addition to the low number of failures, 93 per cent of franchisees are running a profitable business.

All of this means that the risk of lending to a franchisee is lower than for a conventional SME and therefore applications for finance will be looked at more favourably.

With interest rates predicted to fall during 2009, finance costs are likely to become more affordable, which will have a positive impact on those franchisees looking for finance. However, individuals still need to ensure they protect themselves against any adverse changes in rates. There are a number of methods that can be used and your bank can develop a package to suit your individual needs.

An alternative method of funding working capital is invoice finance, which involves raising finance using your debtor book. The advantage of this is that cashflow is directly linked to business expansion. This method is not suitable for all businesses and your bank will be able to advise you.

Another method of finance to consider is asset finance to fund the purchase of equipment for the business. This can help ease cashflow by spreading repayments over a period of time instead of making a one-off investment. 

Finally, it is worth investing time to develop a strong relationship with your bank, making sure they understand your business model and can work with you to develop financial packages tailored to your individual needs and those of your franchisees. They can also offer help and assistance during these difficult times.

These are the problem areas – things which can lead to a breakdown in the relationship:

•      Not supplying agreed information on time
•      Failing to make loan repayments
•      Repeatedly exceeding overdraft limits
•      Unexpected or persistent trading at a loss
•      Not using facilities for purpose agreed (new boat, cars, holidays)

Communication is key to a successful relationship. To conclude, HSBC is definitely open for franchise business and finance will be available to quality applicants who can demonstrate they have a good understanding of their chosen franchise model and the financials of their business.