Starting a franchise can be a practical way to own a business, particularly if you want the backing of an established brand and a proven operating model.
A franchise typically involves purchasing the right to operate under an existing business, using its systems, processes, and support in exchange for an upfront fee and ongoing costs.
While this structure can mitigate some of the risks associated with starting from scratch, it still requires financial commitments that may need additional funding.
What is franchise finance?
Franchise finance is funding designed to help you buy into a franchise, cover setup costs, or support the business as it starts trading.
It usually comes in the form of a business loan, but it can also include other types of business finance depending on what you need and how quickly you need it.
Even though you’re joining an established brand, most franchises still require a significant upfront investment. That’s why many people starting a franchise use finance to spread costs over time, rather than using all of their cash in the beginning.
Why might you need franchise finance?
Most franchisees have a mix of upfront setup costs and ongoing running costs, and the total can vary depending on the brand, sector, and whether you’re taking on premises. Upfront costs you may need to budget for include:
- Initial franchise fee
- Training costs
- Legal fees
- Premises costs
- Fit-out and refurb costs
- Equipment or vehicles
- Opening stock and suppliers
- Launch marketing and advertising
It’s also worth planning for ongoing costs, such as royalties, marketing contributions, and overheads like wages, utilities, rent, and supplier payments.
Most new franchisees will also need working capital. Even with a strong brand behind you, it can take time for sales to build and for cash flow to settle. A buffer can help you cover early trading costs without putting pressure on the business.
Types of franchise funding
Every franchise has different costs, timelines, and cash flow pressures. That’s why the right type of franchise finance for one business might not be the right fit for another. Here are some of the most common options.
Unsecured business loans
Unsecured business loans don’t require you to put forward an asset as security. They can be a useful option if you want a straightforward loan for your franchise business, or if you don’t want to tie the borrowing to a property.
This type of funding can be used for a wide range of costs, including the franchise fee, working capital, marketing, staffing, stock, and setup expenses. Repayments are typically fixed, which can simplify budgeting and planning.
Secured business loans
Secured business loans use a UK property as security. Because there’s less risk for the lender, secured borrowing can sometimes be suitable if you’re borrowing more, need longer terms, or want to reduce the overall cost of finance.
This option can be useful to support a major investment, but it’s important to understand the risks if repayments aren’t maintained.
Asset finance
If your franchise requires equipment, machinery, or a vehicle to operate, asset finance can help you spread the cost over time, rather than paying the entire amount upfront.
In many cases, the asset being funded is linked to the agreement. That can make asset finance a practical choice for item-specific purchases, while keeping more cash available for running costs.
Revolving credit facility
A revolving credit facility works in a similar way to a business overdraft. You’re approved for a credit limit, and you can draw down funds, repay, and reuse them as needed.
This can be useful for managing cash flow gaps and short-term expenses, such as stock purchases, supplier payments, or seasonal fluctuations. Interest is typically charged on what you use, rather than the full credit limit.
Merchant cash advance
If your franchise processes a high volume of card payments, a merchant cash advance can provide access to funding based on your card sales volume.
Repayments are taken automatically as a percentage of your card takings, which means repayments can fluctuate in line with revenue. This can be helpful if your sales are seasonal, but you still need to understand the total cost and how it will impact your cash flow.
Are you eligible for franchise finance?
Eligibility for franchise finance depends on the type of funding you’re applying for and whether you’re starting from scratch or buying an existing franchise.
The typical eligibility criteria lenders look for include:
- UK-based business
- Trading history (start-up options may be available for franchisees)
- A level of turnover that supports the borrowing
- A clear funding requirement and a realistic repayment plan
What lenders consider when assessing your application
Lenders will usually assess several areas before offering a loan for a franchise business:
- Affordability: They need evidence that you can comfortably manage repayments. This is often based on your cash flow and existing financial commitments.
- Bank statements: Where you’re already trading, lenders typically review recent bank statements to understand income patterns and day-to-day cash balances.
- Credit history: Your personal credit profile, as well as your business credit profile, can impact whether you’re approved and the terms you’re offered.
- The franchise brand and model: Lenders often want to understand the franchise’s track record, expected margins, and how the model performs in similar locations.
- Your experience and background: Relevant management or industry experience can strengthen an application, particularly for first-time franchisees.
- Deposit, security, or personal guarantee: Depending on the lender and the type of funding, you may be required to provide a personal contribution, security, or a personal guarantee.
Pros and cons of franchise financing
Franchise finance can be a practical way to cover upfront costs and protect your cash flow, but like any type of borrowing, it comes with trade-offs. Here are some advantages and potential disadvantages to consider before applying.
Pros of franchise finance
- Spread the cost of setup: You can cover large upfront costs, like the franchise fee, fit-out, equipment, or opening stock, without using all your cash at once.
- Protect working capital: Keeping cash in the business can help you manage early trading costs such as wages, rent, and supplier payments.
- Flexible funding options: Depending on what you need, you can choose between a loan, asset finance, or a flexible credit facility.
- Support growth later on: If your first unit is performing well, finance can help you expand, upgrade equipment, or open additional locations.
Cons of franchise finance
- Repayments add pressure: New franchises can struggle to build consistent revenue, and fixed repayments can be even harder to manage if sales grow slower than expected.
- Interest and fees: Arrangement fees, early repayment charges, and late payment penalties can add to what you repay overall.
- Personal guarantee or security: Some lenders want extra assurance, especially for start-ups or larger borrowing amounts.
- Not every option suits every franchise: Some products are only available if you accept card payments or invoice customers, and borrowing for the wrong purpose can be more expensive than necessary.
How to apply for franchise funding
Applying for franchise funding can be quick and straightforward, especially when using an online lender like Aurora Capital:
- Complete an online application: Share your business details, the franchise you’re buying, how much you want to borrow, and what the funding is for.
- Submit paperwork: This typically includes bank statements from the last 3–6 months, ID verification, and basic supporting information.
Receive a decision: Applications can often be assessed within 24 hours, depending on the lender and the complexity of your request. - Access the funds: Once approved and you’ve signed the agreement, funds can be sent to your business bank account.
