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Thinking of buying a business franchise? Before you go to the bank for a business loan, then, just as it is with a major financial decision, it is paramount that you complete due diligence to ensure you understand the full implications, liabilities and potential of owning a business.

Secured vs Unsecured Business Loans

Business loans can be provided by a bank or by another lender and usually have a loan term of around five years. It’s also important to note that for non-franchise businesses such as a dairy or superette, 50% lending from a main bank is possible, whereas lending can be up to 65% for trusted brand franchises. Regardless of the business, business loans tend to fall into three categories: secured, unsecured or a combination of both.

What is a Secured Business Loan?

As the name implies, a secured loan comes with security for the lender in some form of valuable asset such as property or accounts that can be used as collateral by the lender if you’re unable to pay the loan repayments. Compared to unsecured business loans, secured business loans tend to have lower loan terms and interest rates.

What is an Unsecured Business Loan?

Conversely, an unsecured business loan doesn’t require any asset to secure but is based on your predicted business cash flow and how creditworthy the borrower is.

Whilst it’s important to carry out due diligence for secure loans too, unsecured loans do require more due diligence from both the lender and the borrower.

As the borrower, it’s important to assess the franchise you are looking to buy:

• Ask an accountant to provide a realistic financial forecast, taking into account the fees and royalties you need to pay to the franchisor and sign-up and ongoing fees.
• Speak to current franchise owners about where their sales and profit lie compared to predictions.
• Find out why the current vendor is selling their business and ask to be provided with the last two years of profit, loss and GST returns.
• Speak to the franchise’s customers and get a sense of the industry to see if the products are well received and if the industry is growing.
• What is the future of the business, is it sustainable? It pays to look for upcoming or future government infrastructure plans, and policy changes of council plans that might affect the business or the surrounding area and the subsequent foot traffic.

The lender will want to know:

• Is there a cash contribution to this transaction?
• What are the business’ realistic projections and forecasts? These should be provided by an accountant.
• What is your business plan? This needs to be set out by an accountant who has carried out the necessary due diligence.
• What is the borrower’s experience in running a similar franchise or business?
• What is the borrower’s current employment and in which industry.
• Who will be working at the franchise? Will you be managing it or will there be a manager and how many staff are there?
• What is the competition like? Are there other franchises nearby?
• What are the terms of the lease for the premise?

If you are thinking about applying for a business loan for a franchise, then speak to the expert team at Finance Hub.

Please note this blog just serves as a guide and is not financial advice, please contact our team for in depth advice by calling 0800 346 482