How to fund buying a franchise

The franchise fee is the number on the brochure, and it’s rarely the number you need to borrow. By the time the site is fitted out, the kitchen or counter is equipped, the opening stock is in and the staff are trained, the total investment can be several times the fee. Good franchise finance starts with that full figure, and the franchisor has already written most of it down for you.

Start with the disclosure document

The Franchising Code of Conduct requires the franchisor to hand over a disclosure document, the franchise agreement, a copy of the Code and an information statement no later than 14 days ahead of signing or paying anything non-refundable. If you’re leasing the premises from the franchisor, you also get the lease or agreement to lease. There’s a short cooling-off period after signing too.

Those 14 days are your finance window. The disclosure document sets out the payments you’ll make to the franchisor, the fit-out and site requirements, the term and what happens when it ends. A lender will read it closely, so read it first and pull these figures out:

• The initial franchise fee and any training or establishment fees
• Estimated fit-out and equipment costs, and whether you must use nominated suppliers
• Ongoing royalties and marketing levies, usually a share of turnover or a fixed weekly amount
• The franchise term and renewal options
• Any requirement to refurbish the site part-way through the term

Before you even ask for the documents, check the franchisor on the free Franchise Disclosure Register. Its guidance says buyers should be careful before handing over money to a franchisor that isn’t listed.

New site or resale: which is easier to fund?

The single biggest factor in franchise lending is whether there’s trading history to read.

	New site	Existing outlet (resale)
What the lender assesses	The franchisor’s results at similar sites, your budget and your contribution	The outlet’s actual financials, BAS and lease
Typical own contribution	Higher, because there’s no history	Often lower, if the outlet trades well
Biggest cost items	Fit-out, equipment, opening stock, launch marketing	Goodwill paid to the outgoing franchisee
Main risk the lender sees	A slower ramp-up than the forecast assumed	Overpaying for goodwill, or a refurbishment falling due soon after you buy
Useful related page	Shop fit-outs	Buying a business

A resale works much like buying any established business, with the franchisor’s consent added in. A new site depends heavily on the strength of the system. A bank that knows the brand well and has funded dozens of its outlets will often move faster than one seeing it for the first time.

What finance fits a franchise?

Option	Best used for	Notes
Bank franchise or business loan	The core investment in an established system	Often the cheapest; full documents and a director guarantee expected
Equipment finance	Ovens, fridges, coffee machines, vehicles, POS hardware	Secured on the gear itself, so it keeps the main loan smaller
Property-secured loan	Fit-out, goodwill on a resale, or a deposit shortfall	Against your home or other property; a home equity business loan is common
Unsecured business loan	Later top-ups once the outlet has trading history	Usually needs six to twelve months of trading in your name
Line of credit	Stock and wages through the opening months	Arrange it before opening day, not after

Banks are a great first stop, particularly with a well-known brand. If the bank declines because the system is young, your contribution is light or you’re new to business, a non-bank lender secured against property can often still fund it. Our franchise finance page explains the loan types in more detail.

How lenders treat royalties and levies

This is the part many first-time franchisees miss. A lender doesn’t look at turnover; it looks at what’s left after every cost, including the ongoing payments to the franchisor. Royalties and marketing levies are usually charged on turnover, so they rise with sales whether or not profit does.

When you model the outlet, deduct royalties and levies before you test whether the profit covers repayments. Then run the numbers through our break-even calculator to see the weekly sales you need just to stand still. If the answer makes you uncomfortable, it’ll make a lender uncomfortable too.

Want a specialist to look at the numbers with you? Send us your franchise details. It’s a quick form and enquiring leaves your credit file alone.

Match the loan to the franchise term

Franchise agreements run for a fixed term, often five years with options to renew. A sensible loan is paid down inside the term you’ve actually secured, not the term you hope to renew into. Lenders think the same way.

Look for these dates in the agreement:

• When the initial term ends, and what renewal depends on
• When a refurbishment is due, because that’s another capital cost, often around the renewal point
• When the lease ends, which may not line up with the franchise term

If a refurbishment is due in year five and your loan runs for seven years, you’ll be funding the refit while still repaying the original fit-out. Plan for it now.

Worked example: a new food franchise site

This is an illustration only. Arjun and Priya are buying a new-site food franchise in a growing outer suburb. The disclosure document and the franchisor’s budget give these estimates:

Item	Estimate
Franchise fee and training	$55k
Fit-out (joinery, electrical, signage, plumbing)	$230k
Kitchen equipment and POS	$120k
Opening stock and launch marketing	$35k
Lease bond or bank guarantee	$30k
Legal, accounting and lender costs	$20k
Working capital for the first three months	$60k
Total investment	$550k

They contribute $140k from savings. The kitchen equipment and POS go on equipment finance of $120k. The remaining $290k is secured against their home as a second mortgage, plus a modest credit line held in reserve for stock and early wages.

Their lender tests the franchisor’s results at comparable sites, deducts royalties and the marketing levy, and checks that the expected profit covers all repayments with a buffer. It also sets the property-secured loan term to finish before the franchise’s initial five-year term ends, so the debt is gone by the time a refurbishment might be due.

Before you sign, tick these off

1. Check the franchisor on the Franchise Disclosure Register.
2. Pull every cost from the disclosure document into one budget, then add a buffer.
3. Talk to existing and former franchisees about real ramp-up times.
4. Have your own solicitor and accountant review the agreement and the lease.
5. Line up finance approval inside your 14-day window, or make the deal subject to finance.
6. Understand any personal guarantee you’ll be asked to sign, to the franchisor, the landlord and the lender.

If this is your first business loan, start the finance conversation early. It takes the pressure off the signing date.

Getting the franchise funded

Buying into a proven system takes some of the guesswork out of starting a business, but if the funding is wrong, a good outlet can still spend its first years short of cash. We regularly help people put franchise finance together, including new sites with no trading history and resales a bank wouldn’t fully fund.

Tell us about the franchise in around sixty seconds. Asking costs your credit rating nothing, and your enquiry isn’t circulated to lender after lender. One of our team reads it and phones you personally. Describe the total investment, your contribution and any property you hold as accurately as you can, and the right option surfaces sooner.

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