How to Fund a Franchise?

It is a very serious and big step to take a deciding to start a franchise to actually opening your doors successfully for business. When starting a new business, there are two (2) ways of sourcing capital:


1. Own capital, and
2. Approaching a bank to for finance.


Own Capital

For sole businessmen (traders and partnerships), it is a common source of finance or money (especially for start up) from the individuals who are forming the business. They may also borrow money from family and friends. Own capital is a costless form of finance, but carries the risk of the money being lost.

Of course, there is always a lot of work to do before you will be ready, willing and able get use to part with any money. You will need to demonstrate that your chosen franchise is the right for the selected environment, carrying out data collection/data gathering, data forecast analysis and techno-economic feasibility studies, business plan, etc. required by any financial institute’s risk management team for the approval of fund or financial support. It is always necessary to know what is all involved in the business. Normally, Banks expect the franchisee to contribute at least 30% of the total cost of the franchise, including its development and implementation (if required). This contribution should come from your own resources.


Before approaching a bank, you need to ensure the followings:


1. First Step: How much money you can afford to purchase the franchise you are interested in, and provide the required funds or financial equity for the payment of necessary facility construction, equipment, operation and management to set up your new business. After that, you can start thinking about other sources of finance for a franchise available to you (the Bank).


2. Second Step: Get the required techno-economic documents from the franchise broker or consultant, which enable you to approach a bank and start discussion through a financial term-sheet to be provided by the bank.


Approaching banks for finance


For many businessmen, one of the biggest hurdles is approaching the bank for finance.

Banks have learnt that it can be safer to lend to franchisees of well-structured ethical franchise systems and with proven and guaranteed market and off-takers. The track record or profile of the franchisor is important to a bank when assessing whether to lend finance. Franchise opportunities with a good reputation and track record will be ranked higher when it comes to a bank offering finance. For a well-established franchise, the major banks can lend up to 70% of the start up costs and up to 50% for new franchises.

It is obviously very important for you to know (in your techno-economic feasibility studies and business plan) how much finance you will need to borrow from banks or any other financial institution. MDA CAPITAL INVEST, a.s. always prepare in the offer a list of costs, including the Total Invest Capital (TIC) you will need for your mortgage/construction of own facility and to secure sustainable operations management of the business (hire purchase, household bills, etc.). Detailed cost shall be provided in the studies.


Inexperienced businessmen do not know what security they can give to back up their loan from a bank and why they must give such security. There is no loan that does not require a security. The basic rule of providing is getting an acceptable security loan or/and Bank Guarantee to back up the loan. The security can be defined as cash back or material or fixed asset, which are characterised as follow:


• When talking about loan security, you must understand that is a loan secured by the pledge of any marketable asset as collateral, which is a specific asset (such as land or building) pledged as a secondary (and subordinate) security by a borrower or guarantor. The principal security is usually the borrower's personal guaranty, or the cash flow (techno-economic studies or business plan) of a business. Except for highly creditworthy customers (who can get loans against only their signatures) lenders always demand a collateral if the primary security is not considered to be reliable or sufficient enough to recover the loan in case of a default. A lien is created when the collateral is registered in the public records office, giving the registered lender priority over other lenders on the same asset or property. Collateral or loan security is mostly required by local bank or receiving bank (in the case of project realized under export credit).


• A Bank Guarantee (BG) is always in a form of cash requested to back a loan, and is mostly a bank-to-bank transaction, i.e. between the borrower’s bank (local bank) and the exporter’s bank (local/foreign bank).


A bank guarantee enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity.


NOTE: A Company with regular business activities, generating sustainable monthly or yearly incomes can always use its bank to provide any security loan or collateral on its behalf, demonstrating that it generates acceptable incomes through its audited financial report or annual reports of the three last or latest years. These documents are always required by the bank’s risk management to evaluate your capability for the requested loan. Besides, you must demonstrate that the current business or project being developed and implemented is techno-economically viable.


•The techno-economic feasibility study and the business plan are very vital documents you must prepare before you start opening discussion with a bank and obtain finance. MDACI, a.s. always helps you with all the required technical and financial document at the lowest cost possible.


NOTE: Note that, for the purpose of due process, MDACI’s technical consortium and financial consortium will not accept documents prepared, developed and processed by MDACI, a.s.

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