Money talks

The UK head of franchise for HSBC, Andrew Brattesani, explains how not to get short changed when you decide to franchise your business

Over the years I have been asked numerous times about the importance of a banking relationship in business and this is no less relevant to franchising. The most common questions I am asked relate to how much will we lend, over how long and what security will we take and generally other ‘lending / borrowing’ type questions.

When thinking about your getting the best out of your banking relationship you almost need to look at it as a food recipe with a number of ingredients for a dinner party. Get the balance of the ingredients right, the food tastes great, get it wrong and you end up trying to re cook it an hour before your guests turn up.

Banking is more than about lending, yes lending is an important part but having the correct structure and banking processes in place are just as important. For example, say we give a franchise a £250,000 five-year loan to cover the net cost of buying into the franchise, refitting a site and paying associated fees, sounds great but no one mentioned that during the start-up phase there will be the need to pay vat quarterly, salaries monthly, payments to the US based franchisor monthly. There is also the need to take payment by credit card and clients’ payment terms are 60 days from month end of receipt of invoice. A £250,000 five-year loan is obviously unfit for purpose and the business will go overdrawn without a facility in no time (unless the franchisee has put significant personal wealth in to cover this).

So to get the recipe right in this case, on top of the loan you would need:

  • A cashflow statement for your bank manager to show where the peaks and troughs of cash are. People get hung up about what this is but it is all about following the money, in and out. I would say in the early days of a business this is key to your success, not a profit and loss. This statement would pinpoint the short-term cash heartbeat of the business and ensure as best you can that there are no unpleasant surprises.
  • A working capital facility: this is to reflect this short-term cash heartbeat of the business as opposed to the loan, which is a long-term facility. Often in franchising this would take the form of an overdraft but could include debtor finance or trade finance to help pay for goods being imported before they are sold.
  • The ability to take credit card payments using a card processor, our preferred partner is GlobalPay.
  • The ability to make dollar payments electronically, so the right combination of internet banking and relevant electronic payment capabilities are key.

This information is needed by your potential bank manager, before they propose to a credit function, to get the right recipe of facilities in place, get this right and your future meetings, whether on the phone or face-to-face, with your bank should revolve around looking forward and how you can best served by your banking partner.

This is really generic advice but it is vital to get the ingredients right but even more vital to ensure you have them in the right measures.

We are lucky in the UK that we have a number of mainstream banks that are experts in franchising, which may go some way to explain the continued success in this sector.

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