Westpac - Raising The Money

So you’ve decided to take up a franchise and go into business for yourself? That’s good news. Once you’ve reassured yourself this really is the business for you, there’s usually just one piece of the puzzle left – obtaining finance from the bank. It might sound daunting but don’t worry – there’s a process to follow that will ensure that you are adequately prepared before you step through those doors.

Your first step is to establish how much money you can put into the business. Take into consideration your current financial situation as well as expenses that you expect in the near future. Once you have done this, you will know what level of finance you will need the bank to provide to fund your new business.

For a well-established franchise system, banks can lend a percentage of the start-up costs. Bearing this in mind, you will then need to ascertain:

1. How much you can borrow.

2. What security you have to offer.

Most importantly, you’ll also need to work out how much your business can afford to borrow – see Repayments below. This is a very important calculation, so take advice from a franchise-experienced accountant – no matter whether you are investing in a $25,000 or a $250,000 business. An accountant will also help ensure that you take any tax implications into account. Remember, it’s better to work these things out before you get into business than realise them afterwards.

Creating A Business Plan

To do this, you’ll need to put together a business plan – your bank will expect to see one and it will help you clarify your ideas and objectives. Preparing, presenting and being able to answer questions about your business plan will help you gain confidence with the bank.

What should a business plan cover? Detail your business objectives, your product or service, your potential customers and the competition in your area and nationally. Describe your ‘Unique Selling Point’ (USP). Show you understand and have clearly defined your potential market – this is essential to making your business a success. And include a cash flow forecast to show the bank you have thought about how much money you need as you establish your new business and where it will be used.

Of course, you don’t need to do all this alone. Many franchisors will assist you in preparing your plan and cash flow forecasts; they are able to draw on figures generated from existing franchisees at different stages which you can then discuss with your accountant. However, you must remember that this is your business and you must understand and take ownership of your plan.

How Will The Banks Assess Your Application?

Banks have different in-house approaches when they are assessing a funding request. However, it will generally follow the lines of:

Person The bank will want to know who it is lending money to. It will carry out a full review of your background, reliability, training qualifications and track record. Including an up-to-date CV in your business plan will assist the bank in building a strong picture of your background. Banks are not only interested in your business projections but will also require a statement of your personal financial position.

Amount How much is required? Banks will expect a franchisee to contribute a percentage of the total cost of the franchise from their own resources. You should aim to borrow the minimum necessary to establish your business without leaving yourself short to fund working capital.

Repayments You must be able to illustrate that the business can afford to repay the borrowings and where the repayments will be coming from. Initially, you will need to calculate your break-even sales and establish if they are achievable. Ensure you outline any assumptions that have been made in your forecasts. Contingency planning is key: have you allowed for the unexpected to happen? Have you allowed for the working capital you’ll need as your business grows? If you’ve consulted an accountant, you should have it all covered.

Security Businesses borrow so they can become established, be successful and achieve their goals. The prime source of repayment for borrowing is the cash which you generate from your business. However, you will have to provide some form of security so that the bank is protected. The type of security – property or investments – and level required will vary from system to system and individual to individual.

Interest & Fees When the bank sets the interest rate for your borrowings, it will take into account your own capital contribution, the security you are offering and its own evaluation of the risk involved. There may also be a fee charged to cover the costs of setting up new borrowing and completing security arrangements. Special arrangements are often available if you are joining a well-established franchise.

Structure

Apart from the amount required, you’ll also want to think about how your finance is structured. You – and your bank – will take into account your own individual circumstances, as well as the term of the franchise agreement and the business’s debt servicing capabilities. Loans are commonly used for the purchase of a business and its assets, and may best be structured either as business or personal loans. Equipment finance may be an option; this can ease cash-flow as payments will be spread over the life of the asset as opposed to a lump sum payment. You may also require an overdraft facility to ease out the lumps in your cashflow, at least until the business has settled down and you are able to predict your needs more accurately.

Banks also offer specialist services that may assist you in starting up your new business, such as merchant services, online banking, risk advice and international trade options. Your franchisor should know what you need but it’s always worth checking – everyone has different needs.

Conclusion

The above may seem complicated but if you take it step-by-step and use a professional advisor, it can be relatively straightforward and will help you get a real understanding of how your new business will work. Westpac has specialist franchise bankers around the country, so feel free to consult them early and often. After all, your bank will want you to succeed almost as much as you do!

This advertorial is taken from Franchise New Zealand magazine Volume 19 Issue 3 

Contact details for Westpac

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