4 Easy steps to working with your bank
Many aspirant franchisees approach the bank for finance without doing proper homework. They don’t prepare a business plan and aren’t able to provide good answers to questions about the business. Don’t fall into this trap – a little preparation goes a long way when dealing with a bank.
You can follow these 4 easy steps to apply for franchise finance:
Complete the full franchise application process and obtain provisional approval from the franchisor to become a franchisee. A financial institution always require you to first be approved by the franchisor before they can assess your financing application
Ensure that you have access to at least 50% of the total investment in cash or similar unencumbered funds.
Contact the bank to start the application process.
Complete the bank’s application form together with your franchise business plan.
Typically, should all the necessary documents be correct and in order, a bank will take 2 – 4 weeks to process your application and let you know if your loan has been approved.
The success of your application will depend on the following:
- Your credit history
- If you are an existing bank customer
- Your financial contribution to the business
- Collateral or security available
- The business prospects and projections demonstrating the viability of the business
- he bank’s understanding of the franchise in question
What your banker wants to know
Any bank will expect you to provide answers to the following:
- How much money do you need? – The loan amount should be “just right”. If you borrow too much, you waste money on interest payments but if you borrow too little, you will soon face a cash crunch.
- How much of your own money will you contribute? It’s important to note that, to qualify for bank finance for a franchise, you need about 50% of the total franchise investment in cash to contribute towards the establishment costs of the business.
- How do you intend to spend the loan? – It is important to understand what items will be purchased with the money from the bank loan.The items bought could act as collateral for the loan. For example, if the equipment prescribed by your franchisor is highly specialised it may not reach a decent price should the business fail.
- How do you intend to structure payments back to the bank? What terms of bank loan you are seeking and how quickly will you repay the loan?. Payments are usually structured on a monthly basis.
- What alternatives can you offer should the business’s cash flow fail to keep up with ongoing financial obligations?
What the banker would ideally like to hear is that you have alternative funds or options available to repay the loan should the business fail to do so. This could be a nest egg of savings you have or an arrangement for a soft loan.
What can you offer as collateral?
The availability of collateral or security is an important consideration. Prepare a list of items you own, together with their realistic market value and how much you owe (if anything) on these items
The loan application
Following an initial discussion with your banker, you will be asked to complete a loan application. Although every bank has its format, the basic information required will largely be the same.
The bank will require the following documents to support the application:
1. A business plan
A business plan is an indispensable requirement for going into business. The business plan should contain a background on the business, its vision and goals and detailed financial projections. Many aspirant franchisees outsource the drafting of the business plan to professionals; the problem with this is that the business plan completed is not always an accurate reflection of the business owner’s vision. This type of miscommunication can lead to the decline of a bank application.
Here are detailed guidelines on drafting a business plan for your franchise.
2. Cash flow projection
The ability of your franchise to generate cash is an important indicator of its viability. The cash flow projection is one document banks will study carefully.
What precisely does ‘cash flow’ mean? It is the amount of cash inflows less the amount of cash outflows during a specific period. The emphasis is on cash, not sales or any other form of paper assets or liabilities. If you can’t draw the cash out of your bank, it doesn’t count. No matter how impressive your sales figures are, until your customers pay you for the goods they have purchased, the transaction has no impact on cash flow.
The upside is that this works in reverse as well. In other words, no matter how much you purchase from your suppliers, cash flow remains unaffected until you pay them. Sounds reasonable enough, until you realise it isn’t always as simple as that, for the following reasons:
- Many customers will expect credit terms.
- By contrast, many suppliers will expect cash on delivery (COD) or at the end of the month.
- You have to pay many fixed expenses including salaries, utilities and rentals regardless if you have been paid.
- Some expenses, such as store rentals, have to be paid in advance.
- Goods may remain in your store for longer than anticipated. As a result, you could be forced to pay your suppliers’ accounts for stock long before you have made sales.
To project the cash flow of your business, calculate the amounts of money you expect to receive during a specific period and deduct the amounts you expect to pay out.
Your franchisor will probably have a template you can use. Alternatively, we recommend that you set up a spreadsheet for this purpose.