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GUY SPY #02: What is the biggest challenge Franchises & Franchisees Face

Updated: Dec 3, 2019

Our new series of articles, Guy Spy, shares the views and opinions of GSM founder and industry expert Guy Symmons, on all things finance. Today, Guy explores how finance becomes the biggest hurdle faced by franchises & franchisees, and how it can be overcome.

One of the biggest challenges that franchisee and franchises face is funding the opening of another venue. Even with a fantastic franchise idea and track record, and the most enthusiastic franchisee, without the right funding, the venture won’t get off the starting block. Wether the franchise brand is a restaurant, beautician, clothes shop or any other retail offering, the start-up costs can be eye-watering. To leverage brand power, almost all franchises will have a strict interior design visual for their retail outlets, so any customer entering the shop instantly identifies the offering. As such, when opening a new site, franchisees will often be required to rip out all existing shop fixtures and start from scratch, in accordance with the branding guidelines. Start-up costs enter the tens of thousands if not the hundreds of thousands of pounds. To have savings of this magnitude for the average franchisee is unheard of, so many turn to their banks for start-up capital to get them going. Traditionally this has been the main source of funding for franchisees, however with all the doom and gloom spread across the media about the high street, banks lending criteria is getting much tighter and it is now much harder to get a business bank loan for a retail venture.

For many desiring franchisees this means their dream will reach the end of the road, unless they get help from the franchise. All good franchises must help potential franchisees navigate the finance market to source the funding for the next site otherwise they will struggle to expand their empire. Of course, franchises don’t have to be finance experts, instead they must nurture a strong relationship with one of the 500 odd finance brokers here in the UK. A broker will better know the market and its trends and with this knowledge is best placed to pitch the business proposal to alternative non-high-street-bank lenders. Brokers naturally have much higher approval rates and with years of experience will know which lenders are best suited to the business proposition and as such will often get the best rates.

Of course a franchisee is able to find their own finance broker, but it’s yet another hurdle to overcome and a difficult one at that. Not all brokers are the same, all have varying experience and have a varying number of lenders they work with. Additionally, franchisees will want to work with someone they trust and know that they can work well with. Alternatively, a franchise can have a recommended broker for franchisees to use. A recommended broker, will not only know the ins and outs of the brand so can better propose the offering to a lender, but if the broker has also secured funding for the franchise before, he will know the lenders who are most comfortable lending to the brand and so will have access to preferable rates. This is all on top of an instantly trusting relationship for the franchisee.

Richard Branson is quoted saying “never take your eyes off the cashflow because it is the life blood of business.” By financing a fit out of a retail space, this enables franchisees to keep savings and bank loans free should cashflow become tight instead of having them tied in to illiquid fixed assets.

At GSM we work with a number of UK wide franchises, and with our assistance they have been able to roll out more stores than they had forecasted. Our motto is friendly, fast and efficient finance, and it is why our clients come back to us year after year, oh and the preferential rates we have access to with our lending panel of 30 lenders and 21 years of experience.

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