Question 1

How does financing an existing franchise differ from financing a new franchise site?

Accepted Answer

An existing franchise can generally be assessed using the site's historical financial statements, recent trading performance, customer activity and established operating costs. A new or greenfield franchise site has no site-specific trading history, so the assessment may rely more heavily on forecasts, the franchise system, proposed location, fit-out budget, buyer experience, contribution and available cash reserves. New sites may also require funding for pre-opening costs and initial trading losses. Neither pathway is automatically easier to finance; the lender will assess the particular buyer, site, franchise system and complete funding requirement.Read our comparison of a new franchise site and an existing business.

Question 2

Can franchise finance cover the franchise fee, fit-out, equipment and working capital?

Accepted Answer

Potentially. Franchise funding may contribute towards the purchase price or franchise fee, fit-out, equipment, vehicles, stock and working capital, depending on the lender and transaction. Different components may require separate facilities because their useful lives, security and repayment profiles differ. The buyer may still need to contribute capital and retain a contingency for delays, cost overruns and early trading losses. A funding assessment should therefore consider the total amount required to open or acquire the franchise, rather than focusing only on the franchise fee or advertised purchase price.Read what costs franchise finance may cover.

Question 3

Does franchisor approval mean finance will be approved?

Accepted Answer

No. Franchisor approval and lender approval are separate decisions. A franchisor may assess whether the applicant is suitable to join and operate within its network, while a lender assesses the buyer's financial position, experience, contribution, security, proposed site or existing business, repayment capacity and overall transaction risk. A lender may also have its own view of the franchise system and industry. Approval by the franchisor does not guarantee that a particular lender will approve the finance application, and lender familiarity with a franchise brand does not guarantee approval for every applicant.Read how franchise lending panels and individual credit approval differ.ACCC guidance: what to do before buying a franchise.

Question 4

What information will a lender request from a prospective franchisee?

Accepted Answer

Requirements vary, but a lender may request personal assets and liabilities, income information, evidence of the buyer's contribution, relevant experience, identification and details of the proposed ownership structure. Transaction documents may include the franchise agreement, disclosure material, lease or proposed site information, fit-out and equipment quotations, forecasts, working-capital assumptions and franchise-system information. For an existing franchise, historical financial statements, tax returns, BAS, bank statements and recent management accounts may also be required. Additional information can be requested once the lender reviews the particular applicant and opportunity.Read our guide to financing the purchase of a franchise in Australia.ACCC guidance: documents and checks before buying a franchise.

Question 5

How do franchise royalties and marketing contributions affect borrowing capacity?

Accepted Answer

Franchise royalties, marketing contributions and other continuing network fees reduce the cash available to meet operating expenses and loan repayments. They may be calculated as a percentage of sales, a fixed amount or a combination of both, and some charges may change over time. A lender may test cash flow after allowing for these costs, rent, wages, stock, tax, equipment commitments and other debts. Forecasts should therefore include all compulsory franchise payments and should not treat headline revenue or gross profit as cash available for debt service.Read how franchise fees, royalties and marketing contributions affect cash flow.ACCC guidance: franchise disclosure documents and continuing costs.

Question 6

Can a first-time business owner obtain finance to buy a franchise?

Accepted Answer

Yes, potentially. A first-time business owner is not automatically excluded from franchise finance, but the lender may closely examine whether the buyer can operate the particular business. Relevant industry, management or customer-service experience, transferable skills, completion of franchisor training, available support, financial position and buyer contribution may all be considered. The lender may also assess the franchise system and either the trading history of an existing site or the assumptions for a new site. Franchise support can be relevant, but it does not remove the buyer's responsibility for the business.Read our guide to franchise acquisition finance in Australia.

Question 7

How does the remaining franchise-agreement term affect finance?

Accepted Answer

The remaining term of the franchise agreement can affect how long the business is entitled to operate under the brand and may influence the available loan term. Lenders may examine the initial term, renewal options, transfer conditions, termination rights and whether franchisor consent is required. If the agreement expires before the proposed loan is repaid, the lender may seek clarity about renewal or use a shorter facility term. Buyers should obtain legal advice on the franchise agreement because renewal is not always automatic and finance approval does not resolve contractual risks.ACCC guidance: the franchise agreement.

Question 8

What do lenders consider when assessing a franchise system?

Accepted Answer

A lender may consider the franchise system's operating history, network size, site openings and closures, franchisee turnover, business model, industry, brand position, franchisor support, supply arrangements, continuing fees and available performance information. The lender may also consider its own experience with the system and whether the proposed site or acquisition is consistent with the network. A lender being familiar with or willing to consider a franchise brand does not mean every site is financeable. The buyer, location, lease, contribution, cash flow and transaction structure still require individual assessment.Read what an approved franchise lending panel may mean for a finance application.Search the Australian Government Franchise Disclosure Register.

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