Franchise loans in Australia: how to finance a franchise

Many people who buy a franchise borrow part of the cost, and Australia's big banks have franchise teams for it. What's less obvious is how the pieces fit: where the money comes from, what a lender looks at, what security you might be asked for, and how the Franchising Code's waiting periods affect a loan.

This guide explains each in general terms, with the sources listed at the end.

The short version. business.gov.au says that in general the government doesn't provide finance for buying a business, so the money comes from private sources, such as your own savings and a lender. Lenders look at you, the franchise system and your security, and want a business plan. Use the Code's 14-day waiting period to get advice and test the repayments, and ask your lender what happens to the loan if you cool off.

This is general information, not legal or financial advice. An accountant, a franchise lawyer and a lender can tell you what applies to you.

Can you get a loan to buy a franchise in Australia?

Yes. Banks and other lenders lend to people buying franchises, and ANZ, CommBank, NAB and Westpac all have franchise banking teams. Approval depends on you, the franchise system and the security you can offer. National Floors doesn't offer financing, so you'd arrange a loan with a third-party lender.

Type of finance	What it is	Worth knowing
Business loan	A lump sum repaid over an agreed term, from a bank or another lender	Secured against assets or unsecured. NAB says franchise loans are often tied to the franchise agreement, usually up to 10 years.
Equipment finance	Hire purchase, a chattel mortgage or a lease on vehicles and equipment	The asset itself can often be the security.
Specialist franchise banking	Franchise teams at the big four banks	ANZ says it offers franchisees of its preferred franchisors improved loan-to-value ratios. Ask each franchisor which banks it works with.
Broker	Someone who compares lenders for you	business.gov.au says some brokers charge fees and others are paid a commission by the lender.

Unsolicited offers of a loan you haven't applied for are almost certainly a scam. Check any lender on the ASIC register.

Where does the money for a franchise come from?

Most franchise buyers use a mix of their own savings, a business loan and sometimes equipment finance or help from family. business.gov.au says the government doesn't generally provide finance for buying a business. If the franchisor offers finance, its material conditions must be in the disclosure document. Here are the usual sources:

Source	What it is	Worth knowing
Your own savings	Money you put in yourself	Lenders will expect some self-funding first
Business loan	A lump sum repaid over an agreed term	Can be secured against assets or unsecured
Equipment finance	Hire purchase, a chattel mortgage or a lease on vehicles and equipment	The asset itself can often be the security
Family or friends	A loan, or a share in the business	Think about the effect on the relationship
Franchisor finance	Finance the franchisor, its agent or an associate offers	The disclosure document must set out its material conditions

What do lenders look at when you apply for franchise finance?

Lenders look at you, your ability to repay and what backs the loan. NAB's franchise banking team calls these character, capacity and collateral. business.gov.au adds that lenders look at your cash flow, debts and spending, and usually want to see a business plan first. In more detail:

Character: the person behind the application.
Capacity: whether you can repay the loan within the timeframe. NAB says franchise loans are often tied to the franchise agreement, usually with a term of up to 10 years, sometimes shorter.
Collateral: what backs the loan. For a franchise, NAB says that can include intangible assets such as the brand, not just bricks and mortar.

business.gov.au adds that lenders look at your cash flow, debts and spending to judge whether you can repay, and usually want to see your business plan first.

The franchise system matters too. ANZ says it offers franchisees of its preferred franchisors "improved loan-to-value ratios", the share of an asset's value a lender will lend against. NAB suggests asking your franchisor who its key banking partners are, and what its requirements for equity and finance are.

How much will you need, and how much should you put in yourself?

Work out the whole cost to open, not just the franchise fee, and how much you can put in yourself, because lenders expect some self-funding. Item 14 of every disclosure document sets out the costs to start, who is paid, when and whether it's refundable. Check it line by line.

Item 14 must list the range of costs to start the business, including property, fit-out and equipment, opening stock, deposits, licences, insurance and any working capital you need before opening, plus recurring payments such as royalties.

How much you contribute varies by lender and franchise. business.gov.au says lenders will expect some self-funding, so ask early. If the franchisor, its agent or an associate offers you finance, the disclosure document must set out the material conditions, such as any minimum unborrowed working capital or a required debt-to-equity ratio.

At National Floors, the estimated total investment is $318,200 to $606,750 + GST, depending on your site and fit-out, and it includes an allowance for working capital. Our guide to what a flooring franchise costs lists what it includes and the costs that can still go above it. National Floors doesn't offer financing, but you can talk to third-party lenders about funding.

What security will a lender ask for?

A secured loan is backed by collateral. If you don't repay, business.gov.au says the lender can take the security to cover its losses. An unsecured loan doesn't put your assets at risk. If you're buying an asset, you can often use it as the security.

Moneysmart says that if you use your home as security and can't pay, the lender may sell it. It also warns that a guarantor, someone who agrees to repay if you can't, may have to repay the whole loan plus interest, and can lose a home or car used as security. Read business loan contracts with extra care, it says, and get independent advice before anyone signs.

The Code adds a safeguard. If your franchise agreement requires you, or your directors, shareholders, owners or partners, to sign a security agreement, such as a mortgage, security deposit, indemnity, loan agreement, guarantor's promise or bank guarantee, the franchisor must give you a copy at least 14 days before you sign the franchise agreement, or when it becomes available if that's later.

How do you prepare a franchise loan application?

To prepare a franchise loan application, know your numbers, write a business plan, gather the paperwork and compare lenders. A lender will usually want your identification, the plan, financial reports and forecasts, lease agreements and your personal financial information. Lenders differ, but the steps are similar:

Know your numbers. Work out what you can put in, the most you could afford to repay, and whether you need all the money upfront or only as you go.
Write the business plan. NAB says it should include an overview of the franchise, market analysis, a marketing strategy and financial projections. Every disclosure document also says a business plan and projections are often prudent.
Gather the paperwork. business.gov.au lists proof of identification, the plan, financial reports and forecasts, lease agreements and your personal financial information. ANZ and NAB publish business plan and cash flow templates on their franchising pages.
Shop around. Compare lenders, including non-bank lenders, and check the lender is legitimate on the ASIC register. A broker can help, though business.gov.au says some charge fees and others are paid a commission by the lender. Unsolicited offers of a loan you haven't applied for are almost certainly a scam.

When you meet a lender, ask what term they'd set and how it lines up with your lease and franchise agreement, whether the rate is fixed or variable, which fees apply, what security and guarantor they require, and what happens if you cool off.

How do the Franchising Code's 14-day periods affect your loan?

The Franchising Code gives you at least 14 days with the documents before you sign, and 14 days to cool off after a new agreement. Neither period ends a loan, so line up your finance and your advice inside the waiting period. A few rules touch money directly:

The waiting period. The franchisor can't sign until 14 days after you get the final documents. Before it signs, it must also hold, for each of an independent lawyer, business adviser and accountant, that adviser's statement that they advised you, or your own signed statement that you got the advice or chose not to.
Payments during the wait. If you pay the franchisor or an associate anything in connection with the agreement during those 14 days, you can ask for it back in writing, and it must be repaid within 14 days.
Cooling off. After you sign a new agreement you usually have 14 days to end it. The franchisor must repay your payments within 14 days, keeping only reasonable expenses the agreement sets out.

Cooling off ends the franchise agreement, not other agreements. The Code says it doesn't end an agreement "with anyone else", such as a loan or a lease, so ask your lender before you sign what happens to the loan, its fees and any security. Our Franchising Code guide covers the rest of the Code, and how to buy a franchise in Australia shows where finance approval fits in the timeline.

What can go wrong, and who can help?

Repayments are due whether or not sales go to plan. business.gov.au says you could lose money and any assets you've borrowed against, and every disclosure document opens by warning that the franchise, or the franchisor, could fail during the term.

Know your protections too. Moneysmart notes that responsible lending obligations don't apply to business loans, so test the repayments yourself. ASIC says to check a business loan contract's terms are fair, and has an information sheet on unfair contract term protections for small businesses. It points eligible small businesses to AFCA for lending complaints, and to the Small Business Debt Helpline for free, confidential advice if finances get tight.

Get advice before you commit. business.gov.au says to hear from an accountant, a lawyer and a business adviser with franchising expertise, and notes that some franchise payments, including loan interest, can be tax deductions.

Questions

Can you get a business loan to buy a franchise?

Yes. Banks and other lenders lend for franchises, and several have specialist franchise teams. Whether you're approved depends on you, the franchise system and the security you can offer. Talk to a lender and an accountant while you read the disclosure document, not after you've signed anything.

What is franchise financing?

Franchise financing is the money that pays for buying and opening a franchise, usually a mix of your own savings and a business loan, sometimes with equipment finance. It can come from banks and other lenders. Some franchisors offer finance too, and if so, the disclosure document must set out the material conditions.

Which banks lend for franchises?

ANZ, CommBank, NAB and Westpac each have franchise banking pages, and other lenders also lend for franchises. Each lender has its own rules and appetite. Ask the franchisor which banks it works with, and compare more than one lender before you commit.

How much of the cost do you need to fund yourself?

It varies by lender and franchise. business.gov.au says lenders will expect some self-funding, so ask your lender and the franchisor what equity is required before you commit. Include your own legal and accounting advice and working capital in the total, not just the franchise fee.

Does National Floors offer finance?

No. National Floors doesn't offer financing, so you'd arrange it with a third-party lender. Whether you're approved, and on what terms, is up to the lender. Ask us about it on a discovery call: check whether your area is open or browse the open territories.

Can you use super to buy a franchise?

Usually not. Moneysmart lists the main reasons you can get super early, such as severe financial hardship and compassionate grounds, and says strict rules apply. Buying a business isn't among them, and breaking the rules can mean extra tax, penalties and lost savings.

Do you need a deposit to buy a franchise?

Usually some of your own money. business.gov.au says lenders expect some self-funding, though how much varies by lender and franchise. Ask your lender and the franchisor what equity is required before you commit, and include your own advice and working capital in the total.