Key Takeaway Table
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Definition
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A franchise is an arrangement where a franchisor licenses its business’s branding, products, processes, trademarks, and more to a franchisee in exchange for a fee.
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Benefits of Buying a Franchise
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Due to the established brand, proven business model, well-known products, existing supply chain, widespread advertising, and ongoing support from the franchisor, franchises are more likely to succeed, which can be reassuring for new entrepreneurs who want to avoid risk.
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Challenges of Franchising
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There are some challenges when it comes to buying a franchise, including less flexibility and a dependence on the franchisor. However, the most significant challenge is the cost, which is why business loans can be very helpful for franchisees.
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How Business Loans Can Be Used in Franchising
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Business franchise loans can help cover the high cost of becoming a franchisee. Some of the costs include the franchise fee, royalty fees, renewal fees, and legal fees. You will also have to pay for the costs of starting up, like real estate purchase or lease, equipment purchase, inventory costs, training fees, franchise fitout, and working capital.
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Business Loans for Franchises
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Franchisees can obtain different business loans to help them pay for the cost of buying a franchise. These loans include secured and unsecured loans, business lines of credit, equipment finance, and fitout finance.
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A franchise is a business arrangement where a business owner provides a franchisee with the licence to use their business’s branding, trademarks, processes, and business model. In exchange for a one-time fee, the franchisee can start a business with the name and products of an already-established brand. For this reason, franchises may be more successful than independent startups that have to build their brands from the ground up.
What are the Benefits of Franchising?
Buying a franchise can offer several benefits for entrepreneurs. Here are some key advantages of buying a franchise:
The brand is already established.
Franchises are usually well-known brands. In Australia, 92% of franchises are locally based and are already well-respected in the country. Buying a franchise gives you access to a recognizable brand that already comes with a loyal customer base, as opposed to an independent business in which you have to build trust and loyalty from scratch.
The products are tried and tested.
Franchises typically offer products or services that are tried and tested. The franchisor will be the one responsible for making new products and improving their existing ones, so franchisees don’t have to invest in product development.
The supply chain is stable.
As a franchisee, you’ll have access to an existing and solid supply chain. You can work with the franchisor’s proven suppliers and enjoy an efficient ordering system, inventory management, and delivery.
You benefit from an established business model.
Franchisors have already developed a successful business model. Franchisees benefit from a proven, time-tested system, reducing the risks associated with starting a business from scratch.
The franchisor will provide training and support.
Franchisors offer comprehensive training and ongoing support for franchisees. These include guidance on operations, marketing, and management, and helping new owners navigate business ownership.
The franchisor handles advertising and marketing for the brand.
Franchisors will typically handle national or regional marketing campaigns. Franchisees can benefit from these large-scale advertisements without having to put effort into finding ad agencies and planning physical and online marketing campaigns.
Challenges of Franchising
Franchising is a great choice if you want to start a business since your likelihood of success is usually based on a proven model. However, there are also some challenges associated with buying a franchise.
One main challenge is the lack of autonomy when it comes to the business. The franchisee will have to follow the processes, rules, and guidelines set forth by the franchisor. The franchise is also dependent on the main brand. If there’s any issue with the brand itself, all franchises can be impacted.
The most significant challenge of franchising is the cost. Buying and operating a franchise can be a significant investment.
How Business Loans Can Be Used for Franchising
Here are some of the most common franchising expenses that can be covered by business loans:
Franchise Fee
The franchise fee is a one-time initial payment made to the franchisor for the right to use its brand name, trademarks, processes, and business model. This fee must be paid upfront, and it starts from a few thousand dollars and can be much higher, depending on the brand.
Initial Investment
Once you pay the franchise fee, you will now start your business, which will come with initial expenses. These may include:
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Buying or Leasing Commercial Space
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Franchisees may need to secure a suitable location for their business, which may involve leasing commercial space or purchasing real estate. Lease costs can vary widely depending on factors such as location and size.
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Equipment and Inventory Costs
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Franchisees are responsible for purchasing the equipment and inventory required to operate the business. The cost of equipment and inventory can vary depending on the type of franchise and the specific requirements of the business.
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Training and Support Fees
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Even though franchisors provide staff training, franchisees are usually required to pay for the training programs. Franchisees may also have to pay for support services such as access to operational manuals and software systems.
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Franchise Fitout
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The franchisee will need to pay the franchisor for the fitout of the business. The franchisor will provide the required furniture, fittings, signages, branding, and other elements that will make the business consistent with all other franchises but these costs are normally paid for by the franchisee.
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Working Capital
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Once the franchise is running, franchisees may encounter cash flow gaps that can be covered by loans. This way, they can pay for essential daily expenses and any unexpected costs.
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Royalty Fees
Franchisees are required to pay ongoing royalty fees to the franchisor, usually calculated as a percentage of the gross sales. These fees are usually paid on a weekly or monthly basis.
Franchise Renewal Fees
Some franchise agreements have limited terms, so you may need to renew the franchise if you want to continue holding the rights to the brand. Once you renew, you must pay a franchise renewal fee.
Legal Fees
If specifically stated in the franchise agreement, franchisees may be required to pay legal fees associated with the preparation, negotiation, and execution of the franchise agreement.
Business Loans for Franchises
Franchisees can access different business loans to help them fund the costs of buying a franchise. They can secure funding from both banks and non-bank lenders, which can have varying approval criteria. Banks will usually ask for full documents and require a good credit score and history. Some banks have approved franchise lists which can streamline the approval process if your desired franchise is on the bank’s list. Meanwhile, non-bank lenders can be more flexible, allowing those with low and no documents, bad credit, and ATO tax debt to get approved for loans.
For franchisees, you may get better terms and a higher likelihood of approval depending on what business you’re franchising.
Here are some of the loans franchisees can obtain:
Secured and Unsecured Loans
Franchisees can have access to both secured and unsecured loans. Secured loans require property security from borrowers, while unsecured loans require other ways to ensure repayment, like guarantees from the business and director. Property security is any significant asset that can be used as security against the loan. These include real estate, equipment and machinery, and any valuable asset.
Business Line of Credit
A business line of credit allows borrowers to access any amount within a set credit limit and support working capital. The interest will be charged on whatever amount you borrow, and once you repay the amount, the credit limit will reset, making the funds available for borrowing again. Lines of credit are suitable for operational expenses that need to be addressed quickly, like paying for daily expenses and covering the costs of emergencies.
Equipment Finance
Franchisees will shoulder the cost of acquiring approved equipment for the business. Equipment finance is a specialised loan that helps cover the cost of purchasing business equipment like vehicles, machinery, point-of-sale machines, commercial kitchen equipment, and more. With this type of loan, you can get the equipment you need upfront, allowing you to start operating immediately. The equipment will serve as security for the loan.
Fitout Finance
The franchisee will have to cover the cost of purchasing approved furniture, fittings, and branding from the franchisor. To help them do this, they can apply for fitout finance, which is a specialised loan that covers any interior improvement to a commercial space. You can finance anything from plumbing and wiring to interior design that’s aligned with the brand.
Fund Your Goals with Business Franchise Loans
Franchising may require a lot of capital, but the results are well worth it. You’ll have access to an established business with an existing consumer base, allowing you to succeed without building everything from the ground up. To help fund your business goals, you can avail of different business loans depending on your needs. Our expertise can help you find the right loans and lenders to start your franchising journey today. Talk to us, and we’ll be glad to help you out.
