Businesses have faced unparalleled challenges over the last few years, but with the UK moving out of recession now is the time for people to capitalise on opportunities for growth.
It is clear that financial assistance for franchises is readily available from banks specialising in the sector. Apart from a strong business proposal what is it that the bank manager will be looking at when applicants present them with their business plan? By Richard Holden, head of franchising at Lloyds Banking Group.
Importance of a good business plan
There is truth in the old saying “if you fail to plan, you plan to fail” especially when you’re starting a new business. Those who understand the benefits of business planning are more likely to be successful than those who react to day-to-day operational issues and are constantly fire-fighting problems. But planning a business is not a simple matter of scribbling down a few ideas. If a franchisee is going to make his plan work, a much more thorough approach must be adopted.
The value of a good business plan cannot be overstated. The initial objective of the document is to help you raise finance for the business and it will also help you understand what you wish to achieve from the business. It is an essential document as it enables you to review your performance against your projections, alerting you to anything that is not going according to plan.
The plan should demonstrate that you understand the business opportunity and the local market for your product or service. Banks can provide a business plan template for you to use. Accountants and Business Link advisers can also provide advice in producing a business plan, but remember it is your document and is too important to leave to someone else to write.
Essential information to include in your plan
A business plan is a document that provides an overview of the business, your objectives, market, staff, equipment and financial projections. It is often assumed that a business plan is just used to secure funding for the business. Whilst this is an important benefit of the plan, it can also assist with the management of the business, such as monitoring the ongoing performance of the business against the original benchmarks and identifying areas for development. The plan is a working document and should be regularly reviewed and updated as the business develops.
The plan is a useful tool to help gather thoughts and set objectives for the business. It should demonstrate that there is sufficient demand for the product or service offered and that you have a good understanding of the market. It should also set out the competitive advantage or unique selling points that the business may have.
Presenting your plan to gain maximum benefit
The presentation of the plan is important to create the maximum positive impact and you should practice its delivery before speaking to a lender so that you come across professionally. Think of those entrepreneurs on the BBC’s Dragon’s Den. From the outset, many don’t stand a chance of securing the investment they are seeking because their presentation is poorly conceived, or they don’t have a good understanding of the key financial information for their business. Consequently, they are unable to establish their own creditability and project confidence in their business.
Careful planning and preparation should put the franchisee in a better position to raise the required finance from a lender and operate his business successfully. The business plan is the most effective way to crystallise your business objectives and provide a sense of direction. Used in the right way, the plan is an essential tool. However, crucially no business plan should be set in stone and should be regularly reviewed as the business develops.
Understanding the bank manager’s assessment
Banks have a variety of tools to evaluate funding propositions and most will use a mix of credit scoring and checks with a credit reference agency, such as Experian, to access the funding risk.
Bank managers will usually base their lending decisions on the traditional canons of lending. These are followed, not only in the interest of the bank, but also of the customer, who can take comfort that full and fair consideration has been given to his application for financial support.
It is important that you are aware of the factors your bank will consider when making a lending decision so that your business proposal will hit the mark.
When you present to a bank you need to provide them with enough information and reassurance so they can mentally tick off each element of their aide-memoire and hopefully agree your proposal.
Canons of lending
Even though banks may use different methods, the basic principles are similar. The two most common mnemonics ingrained in the bank manager’s mind are CCCPARTS (Character, Capital, Capability, Purpose, Amount, Repayment, Terms, Security), and CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment, Insurance).
Character: Ultimately banks will lend money when there is a very good chance that they will be repaid, so establishing whether the customer is trustworthy and their track record is an important consideration. If there are any doubts over the customer’s character the lending proposition will not proceed beyond this stage and be declined.
The bank will look at whether the customer is making exaggerated claims that are too optimistic, or has adopted a more reasonable and conservative approach. The repayment of any previous borrowing will be looked at, and for new customers bank statements will be requested to assess how they have conducted their accounts in the past.
Ability/capability: The bank will look at the borrower’s skills and experience as well as their drive to build a successful business. It is rare that one individual has all the skills required to run a business and consideration will be given to the abilities of its management team and key staff, and any potential weaknesses.
Margin/terms: The interest margin and terms offered by the bank will reflect the risk involved in the lending. Proposals that include adequate security are likely to attract lower interest rates than unsecured deals. The amount and complexity of the work involved will determine the level of fees. Remember, however, there may be some room for negotiation with the bank in certain instances. When compiling your financial projections remember that rates are presently very low, but set to increase. Therefore, you should assume a higher rate in your forecasts to allow for likely increases in the base rate.
Purpose: The bank will need to establish that the purpose of the loan is an acceptable risk and in the customer’s best interests. In their optimism to press ahead, customers can overlook potential problems, while the lender can bring a degree of realism to the proposition.
Amount/capital: The lender will consider whether the amount being sought is appropriate and may challenge any assumptions. The amount requested should be in proportion to the customer’s own stake. A reasonable contribution from the borrower will show its commitment to the bank.
In the case of investing in a well-established franchise, most franchise specialist banks will consider financing up to 70 per cent of the total investment costs. The borrower should also have a contingency reserve in case the business takes longer than expected to get off the ground. You should provide the bank with a full breakdown of your assets and liabilities as well as your income and expenditure requirements.
Repayment: The repayment source of any lending needs to be established at the outset. Repayment will usually come from trading profits and this is where your projections will be thoroughly tested by the bank. Historic trading figures and up-to-date management accounts are essential for existing businesses.
New start-up businesses will be projection-led and open to challenge from the bank manager. A franchise specialist bank is likely to have experience of existing franchisees in the system who bank with them and be able to draw on that knowledge to consider the likely repayment capabilities.
Insurance/security: Security is usually required as a secondary repayment source for the borrowing. Banks don’t lend against the security alone and the canons of lending need to be met, irrespective of the available security.
The bank will not be in a position to release the agreed funds until all elements of the security have been completed. This may take several weeks and applicants need to work with the bank to ensure that the procedures are completed within realistic timescales. The bank will also look at any potential issues resulting from any gaps in the borrower’s insurance provisions which may impact of their ability to repay the agreed finance.
It is unlikely that the actual trading performance will exactly match the borrower’s projections and, therefore, the bank will regularly monitor and review progress. The earlier that problems are identified, the better the chances of the bank being able to offer practical advice to overcome them. An understanding of the borrowing requirements and credit risks associated with the lending are essential to the bank manager in arriving at his decision to lend. Put yourself in his shoes and consider the canons of lending set out here. This will give you the best chance of securing the bank’s support.