Sources of finance - the attraction of franchises

In general, Banks don’t like to lend to business start-ups. The risks are high and the returns uncertain. However, there is one kind of “start-up” which the UK banks are often happy to finance - franchises - and this is illustrated with the launch of a new £100million franchise finance fund by RBS & NatWest. Details of the new finance fund are provided here on Smarta. The claimed benefits of franchisees which apply to the fund include:

• Loans of up to 70% for new franchise businesses (percentage of the total finance requirement)
• Two years free banking for new franchises
• Reduced fee of 1% (the loan arrangement fee charged by the bank)
• Up to 12 months of capital repayment holidays (i.e. start paying back the loan later - perhaps when the franchise is better established)
• Loans for existing franchise businesses (e.g. refinance to move away from the existing banker!)
• Access to an unlimited expertise from the dedicated RBS/NatWest franchise team

Why do banks like lending to franchises? The answer lies in the lower perceived risk of a well-established franchise. Over the years, the banks have gained a great deal of experience in working with franchisees. They understand the likely financial profile (revenues, costs and cash flows) of a Subway, Dominos or Green Thumbs franchise.