So you want to get into a strong, challenging leadership role… That’s great news for your earning potential. The specialist cleaning industry is ideal for a franchise business.
It’s fun. It’s tough. You’ll be helping hundreds of customers. But it’s also an expense to bear, at least when you’re trying to afford the start-up costs.
Rainbow International ask for £47,000+VAT as the initial purchase fee. That gives you access to our brand, expertise and training programme. Yet more capital is required to secure a venue and keep the business afloat during the first few months.
You’ve come here because you’re unsure about financing such a commitment – which is totally understandable.
Don’t worry, though, because we’re going to outline how you might do it. Raising capital is achievable. One or several of the following methods are proven to help aid, and bring about, successful financial applications.
Create a business plan
Every franchisee must compose a strategy for their new venture. It’s the only way that lenders, as well as the franchisor, can put their faith in your business acumen.
The opening section should explain the brand, define the competition, and say where you’ll fit into a regional market. Then it’s time to talk finance.
What resources do you require? How many staff are you hoping to take on? Will there be running costs, such as fuel and electricity? Insurance? Resupplies at a regular interval? The answers to these questions are crucial to figuring out your profit-making potential.
Along with your outgoings, lay out what you’ll charge for every cleaning and restoration assignment. The issue of paying yourself should be raised too – as the owner, you’ll want a decent wage, but that shouldn’t come at the literal expense of the franchise business.
Your franchise partner will help you identify what’s unique to specialist cleaning. After that, it’s up to you to forecast how the business will grow, the earning timescales, and your break-even points.
Get a business loan
When the plan is ready, you’re set to approach a bank for financing. Up to 70% of your investment can be fronted by a good lender. The most common route is a business loan, which is repaid on strict terms. There are two subsets to consider:
- A small business loan of £1,000 to (generally) a maximum of £35,000. With that 70% figure, you can – in Rainbow’s case – apply for £33,000 for the purchase price. With this particular method of financing, you can benefit from a fixed interest rate that’s paid back steadily over a certain period of time – which could range from 12 months to 10 years.
That’s helpful for a business leader who wants to start out with a small team, or by themselves, as they try to establish a successful specialist cleaning territory. With a rate that stays fixed, there’s more certainty as to what you’ll owe, but you could miss out on a fall in the interest percentage.
- Flexible loans for limited companies, partnerships or sole traders. As the name suggests, with this loan you are granted more freedom. You are able to ask for a fixed or fluctuating rate that may drop and save you money, as well as getting more time to pay it back.
For limited companies, the loan starts at £10,000, whilst other corporate structures will need to borrow a minimum of £25,000. Quarterly payments are optional, which suits a business model that expects a quick influx of cash at stages throughout the year.
Bear in mind that you’re taking on more risk, to afford both a quarterly debt plan and the chance of higher interest.
Choosing the right loan depends on what you’re comfortable with. If you go for a flexible agreement, think very carefully about the savings you’ll have to put aside, just in case the lender spikes its interest levels.
Rapid growth is probably better for this loan type. It’s important to make use of the support offered by the franchisor because you can discuss how best to use the money together, averting the risk of default.
Arrange a business overdraft
We all know what overdrafts are. A professional version functions in the same way, leaving a little extra cash for withdrawal when your account is empty.
This can be used to meet temporary costs, such as paying a member of staff when your clients have outstanding invoices, or investing in resupplies when you go through more equipment or tools than expected.
The difference is that a business overdraft is much bigger than the sort you may be used to, climbing to £300,000 or higher if you want it to.
So, essentially, it creates a reserve to keep your cash flow ticking over. But trust us – you don’t want to use it for a main franchising fund. Interest rates can be brutal.
When a franchisee takes out £30,000 at 7% interest, for example, they will be paying back £32,100 at the end of the year (when most agreements end). You will also be charged, daily, for exceeding the limit. They’re brilliant for an emergency cash pile, yet they punish business owners who rely on them too much.
Banks don’t ask for much – they’re easy to arrange, and can be renewed when the timescale closes.
We advise that such overdrafts can cover additional costs in your first year – periods when you’re going to be taking less business, perhaps, or in the event that a number of customers don’t pay when they’re meant to – and only in the region of £10,000 or less, which will keep the repayments down.
Explore a commercial mortgage
You’ll need an office from which to work, as well as expand the administrative team. To secure a property, commercial mortgages are the first choice if you can’t afford to buy a place outright.
The basic principles are the same as a homeowner’s mortgage. You get better interest rates on a smaller Loan to Value ratio (the percentage of the full price you’re borrowing), and there are fixed, flexible and introductory discount offers. Payment periods run up to 30 years. However, a few differences exist:
- There are many details to flag up, such as having enough space for staff and office supplies, in addition to cataloguing every room, facility and parking space. Lenders don’t like you to be unclear on the facts during your application.
- Rates vary with the industry you’re in. Much of that relies on your business plan, paired with the lender’s own assessment of the commercial sector. Luckily, specialist cleaning can be a healthy enterprise, so you shouldn’t have too much to worry about if your strategy is solid.
- Key stakeholders must be credit checked. That applies to anyone who’s running the business with you, as their decisions can influence what happens to your profit margin.
Obviously, the disadvantage is that, in the long term, you’ll be paying more for the building, since interest will accrue.
Buying an office with your own cash is preferable, though not always possible. Using a mortgage broker is a great idea: they can source an agreement that aligns with what you can afford.
Start your steps to franchise success…
That’s everything – the ins and outs of the different capital-raising methods available to prospective franchisees.
The specialist cleaning trade is ripe for new, innovative entrepreneurs to carry out our established practices.
We can assist you on many of the points we’ve described here and, after a two-week franchise boot camp and ongoing support, you will gain further clarity on how to manage your business finances successfully. Talk to our recruitment team for more information.