Business loans
How to fund a franchise: business loans, deposits and working capital
Buying into an established brand does not remove the risk of running a business. A franchise funding plan needs to explain the local opportunity, the full opening cost and how debt will be repaid.
Quick answer
Calculate the entire investment, contribute an affordable amount of your own capital and compare finance that matches the assets and cash-flow cycle. Review the franchise agreement independently before committing. A lender’s relationship with a brand is not a guarantee of approval or commercial success.
Key points
- Budget for royalties and the trading period before the outlet becomes cash-positive.
- Separate equipment finance from general working-capital borrowing.
- Check that the franchise term, lease and finance obligations fit together.
Calculate more than the advertised franchise fee
The headline fee may exclude premises deposits, professional advice, training travel, fit-out, equipment, stock, recruitment and opening marketing. Add any applicable VAT and the cash needed while customer sales build. HMRC describes franchise arrangements as involving an initial payment and continuing fees; the actual contract controls what you owe.
Ask what royalties are based on. A percentage of turnover can remain payable when the outlet makes a loss. Check minimum fees, required suppliers, advertising contributions and refurbishment obligations. A franchise resale also needs due diligence on existing debts, equipment ownership and the quality of historic trading records.
Test the unit economics rather than the brand’s headline sales
Ask what remains from revenue after stock, royalties, premises, labour, delivery, marketing contributions and finance payments. A recognised brand can attract customers without making every location profitable. Request the assumptions behind any illustration and distinguish company-owned locations from comparable franchise businesses. Location, opening hours and the owner’s unpaid labour can materially change the economics.
Suppose monthly sales are £35,000 and the relevant operating costs total £31,000 before loan repayments and owner remuneration. The apparent £4,000 surplus must still cover those items and unexpected costs. A 10% sales decline does not necessarily reduce rent or minimum staffing requirements. Run that downside case before deciding how much business finance is affordable, and obtain independent accounting advice on the complete proposal.
Align the finance term with your rights under the franchise
Read the franchise agreement alongside the premises lease and finance proposal. Check the licence period, renewal conditions, territorial rights and obligations to refurbish or replace equipment. A loan can remain payable even if a franchise relationship ends. Do not assume the lender’s proposed term proves that renewal or an eventual resale will be available.
Ask a specialist solicitor about transfer restrictions, termination, personal commitments and the consequences of failing to meet the agreement. Map any required future investment into the forecast. If significant refurbishment is required during the borrowing term, money must be available for both the new expenditure and existing repayments. A legal review and lender assessment answer different questions; neither replaces independent commercial due diligence on whether the site works.
Fund the opening period, not just the opening day
An attractive fit-out budget can hide the cash needed after launch. Include initial stock, wages, rent, utilities, ongoing fees and the time until receipts cover costs. Ask whether a launch promotion temporarily reduces margin or whether card settlements and invoiced customers delay cash collection. Keep a contingency for a later opening, rather than assuming all payments move automatically when the start date slips.
For illustration, a six-week delay with £3,000 of unavoidable weekly outgoings adds £18,000 before considering lost receipts. That is a scenario, not a typical franchise cost. Decide which costs can genuinely be postponed and which contracts are already binding. Match the working-capital facility to the likely duration of the gap and show how repayments remain affordable after the first trading season.
Compare offers using the actual cash you receive
Request a written breakdown of the advance, deducted charges, repayments, security and any guarantee. Separate the franchise purchase price from what the lender will actually release. Asset finance may cover eligible equipment without paying licence fees or payroll, so two offers with the same headline amount may fund different parts of the project.
Check what happens if the launch does not proceed after you have incurred valuation, legal or broker costs. Ask about conditions before drawdown and whether paying a deposit makes it refundable if finance is declined. Prepare an alternatives plan that does not depend on instant approval. The final decision should combine a workable site, affordable finance and acceptable contractual exposure—not simply whichever lender responds first.
Build a sources-and-uses schedule
An illustrative outlet needs £25,000 for the licence, £40,000 for fit-out and equipment, £10,000 for opening stock and £25,000 for working capital: £100,000 before any omitted taxes or contingency. If the owner contributes £35,000, the remaining funding requirement is £65,000, not just the licence fee.
List where each pound comes from and when it arrives. Equipment finance might cover eligible assets, while a business loan covers other permitted costs. Do not assume a deposit can be borrowed or that every cost is eligible. There is no universal franchise deposit percentage.
| Cost | Question |
|---|---|
| Premises and fit-out | Who owns improvements if the franchise ends? |
| Equipment | Is it eligible for separate asset finance? |
| Working capital | How many slow months can the plan absorb? |
Show a lender why this location can repay
Prepare local demand evidence, your operating experience, management accounts for a resale and a monthly forecast. Separate the franchisor’s suggested sales from evidence you can verify. Speak to existing franchisees with permission and ask about opening delays, margins and ongoing support.
Model a delayed opening, sales below plan and higher wage costs. Explain which costs can be reduced without breaching the franchise agreement. Lenders considering unsecured business loans may still request a personal guarantee; unsecured does not mean that your personal finances are automatically protected.
Check the contract before choosing finance
Use a franchise-experienced solicitor to review territory rights, renewal, termination, transfer restrictions and personal obligations. Compare the franchise and lease expiry dates with the proposed loan term. A loan can remain payable after a business closes or loses the right to trade under the brand.
Request a complete finance quotation showing net funds received, total repayment, fees, security and early-settlement terms. Compare alternatives on the same assumptions. Do not choose fast business loans simply to meet a deposit deadline if the legal and trading checks are unfinished.
Read next:Explore business loan options
Common questions
- Can a new franchise get a business loan?
- Possibly, but lenders assess the applicant, business model, contribution, experience and affordability. An established franchise brand does not replace those checks.
- Are franchise fees automatically tax-deductible?
- No. Tax treatment depends on what the payment buys and the agreement. Ask an accountant to distinguish capital and revenue costs rather than assuming the whole fee is deductible immediately.
Sources
Sources were checked on 16 October 2026. A source check confirms what these publications said on that date; it is not a financial review of any product.
- Franchising: general — HM Revenue & Customs
- Getting your business ready for finance — British Business Bank
- Personal guarantees for business borrowing — British Business Bank