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Franchise Loans

Thinking of buying a franchise? Getting finance is easier than you think

Buying a franchise can potentially be the most financially rewarding decision you ever make in your life but how easy is it to get a loan to buy one?

The great news is that franchise businesses are seen as a stronger model than other businesses so this already puts you on the front foot in getting approved for finance.

There are a number of franchises that are favoured by a few of our lenders but we can line you up with the bank that will offer you the most favourable terms and allow you to borrow up to the maximum Loan to Value Ratio (LVR) for your situation.


How does a franchise loan work?

Franchise loans work very much in the same way as a standard business loan with similar features and commercial interest rates.

The biggest difference is that you can generally borrow more against the value of the business than if you were to buy a similar-sized non-franchise business in the same industry.

Because of this, you don’t need as big of a deposit or use as much equity in an existing residential property as security to complete the purchase.

How much can I borrow?

You can borrow between 50-70% of the business value of an existing store or up to 65% for a new store or business such as Mad Mex.

By using an existing residential property as security for the franchise loan, however, you could borrow up to 100% of the purchase price.

We can help you do just that and refinance your home loan to cheaper interest rate while we’re at it.

In order to borrow at the maximum LVR for the value of the business, it really depends on the strength of the franchise system.

Franchise systems that have been around for a number of years, such as Domino’s or Outback Jack’s, are considered more stable models that have been perfected over time.

The average turnover statistics they can provide for each franchise store is significant and something the lenders can “hang their hat on” so-to-speak.

Other factors that determine the amount you can borrow are the same performance indicators that a bank would consider for a non-franchise or independent business, including:

  • How long the business has been operating.
  • That the last 2-3 years business financials show profits steadily increasing year-on-year (certainly not decreasing).

Please call us 1300 889 743 or complete our free assessment form to find out if you qualify for a franchise loan.

What are the franchise loan terms and features?

A franchise loan has one major difference to a standard business or commercial property loan.

The loan term is tied to the length of lease or, in the case of franchises, the franchise agreement term.

Because of this, lease terms are generally shorter for franchises, meaning there are few differences in the features available to you.

These features include:

  • Loan term: It could be anywhere between 5-10 years depending on the length of the agreement signed with the franchisor.
  • Loan term with property as security: 25 to 30 years (standard loan term).
  • Interest only: Around 2 years or more depending if you’re using property as security.
  • Low doc options are not available.
  • Bad credit options are not available.

What is a franchise loan?

Essentially, franchise loans are secured against the value of the particular store, outlet or restaurant that you’re looking to buy from a franchisor.

The market value of the franchise will be determined by the bank’s own valuation and not that of the franchisor.

The loan itself will typically cover franchise fees, training costs, stock and business assets of the franchise business although you’ll still need to show that you have working capital to get the business running and be able to weather times of hardship.

How do I get approved?

As long as the franchise is on an approved list with one of our lenders, you’ll generally only need to meet a few more requirements.

Firstly, for an existing store, the bank will want to see the last 2-3 years business financials of the current franchisees including business tax returns, profit and loss statements and business bank statements.

There is usually an interest cover requirement as well which is essentially how many time yearly earnings before interest, tax, depreciation and amortisation (EBITDA) can service or cover the interest component of the loan amount you want to borrow.

New stores won’t have this information, in which case the bank will be relying more on your business plan, which should provide details on cash flow forecasts and how you plan to inject your own working capital and resources in running a viable store.

Bear in mind, the bank will typically want to see a business plan for an existing store as well.

That’s because the deal has to make sense: it’s important to present a franchise loan application in the best light which is the reason it’s essential that you come to the table with previous experience in a similar-sized venture in a similar industry.

For example, if you want to buy a Bakers Delight franchise, the typical requirement is that you have 3-5 years experience in a managerial role in either a bakery or at least in a food service/sale capacity.

Without experience, the bank will be concerned that you don’t have the skills and expertise to manage a business and staff effectively.

Which franchises are accepted?

Why are only some franchises accepted?

The first thing to understand about the approved franchise lists that a few of our lenders have is that they are reviewed and updated on a regular basis.

Franchises that are on an approved list today may not be on the list 6 months from now.

What the bank will generally take into account is:

  • Overall exposure to particular industries: Banks don’t want their accredited franchise list to be heavily weighted in any one sector, such as quick service restaurants. They try to balance their book with a good spread of franchises which is why they have yearly limits on the amount they can lend for a franchise.
  • Number of franchises: Banks will typically only consider franchises with at least 30-40 stores. The franchise system also has to be shown to be growing.
  • KPIs: Every franchise model is different whether it’s retail or quick service restaurant. Depending on the business model, there will different financial KPIs that the franchisor will set. The bank will then assess them and determine whether it’s appropriate to give them accreditation.
  • Reputation: Apart from financial indicators, banks don’t like to be associated with franchises that are in the midst of public controversy, whether it’s food poisoning or the poor treatment of staff. Banks will often suspend such franchises from their list in such circumstances.

If you don’t see a franchise that you want to buy on the above list, complete our free assessment form and let us know what you need a business loan for.

We’re experts in commercial finance, with a number of our senior mortgage brokers actually coming from the credit departments of some of Australia’s largest banks and lenders.

Getting tough loans approved is our specialty!


Why franchises trump businesses

Franchise versus business

Franchise

By purchasing a franchise, you’re essentially buying yourself a job with a proven system for making money.

Unlike a business, you’re walking into a well-established brand name like Bakers Delight or Hog’s Breath.

Having such a big presence before you even open your doors is something you just don’t get if you’re looking to fund a start-up business.

You’re also in the position to leverage the national marketing and advertising capabilities of the parent company as well as the existing relationships they have with distributors and suppliers.

Access to education and training is also a massive benefit.

Franchises are truly turnkey business and a select number of lenders see it this way as well.

It’s the reason why they’re willing to lend you up to 70% of the business value for particularly strong franchise models.

Of course, the drawbacks of a franchise model is that you don’t always get full autonomy, with minimum standards set for how the store is to be set up, what products and services you can provide and the requirement for you to take orders from head office when needed, such as being involved in national marketing campaigns.

The franchisor and select lenders may consider the franchise to be operating under a proven model but it doesn’t automatically mean your business will be successful.

You’re still having to invest your own capital in getting the franchise off the ground as well: there’s no free ride.

On top of that, you’ll have to pay ongoing fees such as royalties and national advertising costs as part of the franchise agreement.

Luckily, these costs are fixed and the money required for suppliers and distributors are often lower than similar-sized non-franchise business purely because of the buying power of the parent company.

Business

The obvious benefit of a business is that you get full autonomy as to what kind of trade you can undertake, subject to state and federal licensing laws and the zoning of the commercial premises itself.

The costs are also significantly less than starting your own venture.

There’s no answering to upper management so you’re free to run your own affairs regarding training, setting standards and values for the business as well as running your own marketing campaigns.

On that note, when starting your own business, you’re in a position to buy a freehold property and fit it out yourself, giving you a piece of land and property that will either retain its value or appreciate.

This is a key point of difference with a franchise because you’re relying solely on your skills and expertise to build a successful business, build up the goodwill and eventually sell it for a profit.

This reduces the overall risk of relying on the business alone as your sole source of income.

On top of that, you’re actually free to wrap up the business whenever you see fit while exiting a franchise agreement will require you to actually sell the business to another franchisee before you can exit.

Of course, the big drawbacks of a business are that you have to build your own brand and reputation with clients as well as develop relationships with suppliers and distributors that you may need to run your business.

All of this takes time and a considerable amount of money, particularly when you take into that you don’t have any best practice standards to rely on when you’re out on your own.

Tips on buying a franchise system

  • Assess whether you fit with the franchise: Do your skills and past experience compliment the franchise you want to buy? Do you have any resources or business contacts that you can leverage to run a successful venture? These are just some of the fundamental questions to ask.
  • Read the franchise agreement carefully: As you research possible franchises to buy, request a franchise kit from each and every one of the franchisors. Read it carefully to really understand what you’re signing up to and whether it fits with your overall business and lifestyle goals.
  • Consider a franchise course: A few universities actually offer pre-entry franchise programs that will give you a better understanding of what running a business in a franchise system entails as well as your rights under Franchising Code of Conduct such as when you’re able to end a franchise agreement.
  • Speak to previous franchisees: The disclosure statement attached to the franchise agreement must include a list of current franchisees and their contact details, as well as a list of ex-franchisees for the last three years, and their contact details, and whether they were bought back, terminated and sold. Ask them questions! They can be your business mentors as you grow your franchise.
  • Get financial and legal advice: Like buying a non-franchise business, consider enlisting the help of a financial professional to assess whether you’re in a position to invest in the business and a solicitor to run through the terms of the franchise agreement with you. A business adviser will also help you to really question the projected turnover figures that the franchisor is quoting. Generally speaking, the turnover quote is the average, one-size-fits-all number that doesn’t at all match your particular store size or location.

Steps in buying a franchise

This depends on the franchise system you’re buying into, e.g. OPSM franchise has very different requirements to Oporto franchise.

Can I buy an existing franchise?

Yes you can!

In many ways, you’d go through the same due diligence process as if you were buying a non-franchised small business from a vendor.

The franchisee is still a business owner no matter if he’s part of a franchise system or not and you’re buying into that reputation and goodwill.

Some steps you might consider taking include:

  • Checking the last 3 years financial information of the franchisees including profit and loss statements, cash flow reports and business bank statements.
  • Simply asking why the franchisee is selling is a crucial step that many franchise buyers fail to do. In doing so, you can usually identify problems like the business suffering from a poor location (red flag) or simply poor management (an opportunity for you to turn things around).
  • What is in the lease agreement? Typically, you won’t be buying the franchise as a freehold going concern so you should determine how long is left on the lease and what other arrangements there are, bearing in mind that there is usually a head lease arrangement in place between you, the franchisor and the landlord.
  • Hiring a qualified builder or architect to look at the fixtures and fittings of the premises to make sure they’re in working order and that the premises are ready for trade.
  • Organising with a solicitor to have a null and void condition in the contract of sale (heads of agreement) to ensure that any necessary reparations be undertaken by the franchisee before the sale goes ahead.

Apply for a franchise loan

Check out the list of franchise loans we have on offer through our lenders listed on the left-hand side of this page.

After that, give us a call on 1300 889 743 or fill in our free assessment form to speak with one of our specialist mortgage brokers today.

  • Myra

    I’ve been considering getting a franchise loan but I’m also thinking of getting a business loan package instead. Do you have a section on business loans that I can check out and learn from?

  • Hello Myra,

    Yes, we do. You can learn about various types of business loans as well as different business loan features and facilities. Here’s the link to the section:
    https://www.homeloanexperts.com.au/business-loans/