Specialist finance

What is franchise finance?

Starting a business can be as simple as deciding what you want to sell and where. However, if you're looking to start a franchise business in Australia, you'll often need an additional funding source. This is because franchises are significant investments—and many lenders won't provide loans for new businesses run by inexperienced owners (especially if they're starting out of their homes). If you've decided that franchising is the right path for your business goals, this guide will explain how to finance your new venture so that you can focus on building up your store instead of worrying about money problems.

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What is franchise finance?

Franchise finance is a business loan that franchisees can use to help them open or expand their new business. Banks and other financial institutions typically grant these loans with the understanding that they will be repaid on time and in full.

Franchising is a business model that has been around for decades and continues to be popular. It allows small businesses to leverage their brand and spread their product or service through multiple outlets.

Franchisees purchase a licence to use the franchisor's trademark, trade name and business system. In return, they pay royalties to the franchisor based on their sales during the term of their agreement.

The franchise model has proven to be sustainable over time because it provides a solid foundation for both parties involved — the franchisor receives regular royalty payments while providing ongoing training and support, while franchisees receive access to proven business systems that can help them grow their own business successfully.

How does franchise finance work in Australia?

Franchise finance is a type of loan that you can use to buy a franchise. It's available through various lenders and can be used for almost any purpose, including buying small businesses, paying debts, and starting new ventures. But how does it work in practice?

Franchise finance loans work the same as regular loans, with a couple of key differences. The main difference is the loan amount is determined against the value of the franchise (as opposed to the value of the building or property). This means that you can usually borrow a larger amount than a non-franchise without needing as much of a deposit or equity.

The typical term for a franchise finance loan is five years, but this may vary depending on your situation and lender. The length can also vary widely depending on if property is used as security or whether the loan is interest only. Some franchise loans can also be structured to have flexible terms, such as low monthly payments with no upfront fees or interest charges during the first year.

How can I finance a franchise business?

Several types of franchise finance are available, including bank loans, private investors and government programs. To be eligible for these types of funding, you will have to complete an application process and meet specific requirements.

Advantages of franchise financing

Franchise financing is an option if you're looking to start a new business. It's a low-risk way to get started since you don't need to have much money to open your doors. You also get help with marketing, branding and training from the franchisor (the company that owns the brand). You can often keep your existing capital to invest in your business.

When you buy a franchise, you're buying into an existing company with an existing product or service. You don't have to worry about how to create a brand from scratch or how to make a product that people want. You just have to focus on running the business as it was intended by the original owner.

However, this doesn't mean that franchise financing isn't risky. Make sure you research thoroughly and speak to legal and financial advisors before taking on a franchise.

Disadvantages of franchise financing

While franchise financing can be a great way to get your business off the ground, it's not always a good idea. Let's take a look at some of the disadvantages of franchise financing in Australia:

You have less control over your finances. The franchisor has the final say on whether or not you can get financed. If they decide that your business isn't going to be successful enough, you might find yourself without any funds. This can make it difficult for you to get started or expand your business if what you need isn't available from the franchisor or their lenders.

You may end up paying more than expected over time. Many franchisees are locked into long-term contracts with high-interest rates because of their franchise financing agreements. These agreements often include clauses that make it difficult to renegotiate terms if something goes wrong with your business or if conditions change significantly over time (which they often do). This means that you could end up paying far more than you planned.

Your business relies on the whims of the franchisor. The franchisor can legally do that which is in their commercial interest; many franchisees have horror stories of franchisors ending their leasing period before they've made back their investment.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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