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How do lenders decide what you can afford?

It’s rare these days that anyone would simply pay cash to buy their new business. Like many long term investments the upfront cost is simply out of reach for most people, and even when it’s not there can be some very sound reasons to retain a good portion of your capital, whether it’s to pursue other investments, fund business growth, or simply as ‘rainy day’ money.This usually means that when you end up asking yourself ‘Is this franchise in my price range?’, you’re not going to be the only one. Your lender is going to be asking very much the same thing (although they may be coming at it from a slightly different angle).

The simplest question...

For a borrower it probably seems like the simplest of questions; ‘How much will you lend me?’ but for a lender that’s actually quite tricky, there are just so many variables. Instead, most lenders will say; ‘Show me how much you need, and what for, and I’ll tell you yes or no’. So how do we solve the impasse?

Well, whilst there are a lot of things a lender might consider when making a lending decision, there’s two key questions that will cut to the heart of their views on affordability, and ultimately their view as to whether or not you can afford a particular franchise purchase. 1. How much skin do they have in the game? and 2. Does it service? So, what is your bank or finance company looking for?

CFI are the experts when it comes to helping new franchisees get their start!

'Skin in the game'

Skin in the game is about how much of your own money you’re contributing to the setup or purchase of the business. If it were something as a simple as a car being financed, it would be your deposit or trade in value. Using some of your own funds isn’t just about reducing the loan amount required. For a lender there’s a very significant difference between a $100,000 loan to someone that has saved up and is putting in $50,000 of their own money, and the same sized loan to a borrower that only has $10,000 to contribute.Regardless of the size loan we’re talking about, most lenders will want to see a borrower put in at least 20% and quite possibly more, depending on what the borrowed funds will be used for. There are some exceptions of course. If you’re asset rich but cash poor a lender may consider a relatively large loan amount without a large contribution from you, likewise if the borrowed funds are going to be used for something that offers a lot of security (such as a vehicle or quality equipment). As a general rule though, your lender is going to want to see that you’re taking some genuine risk with your own money, not just theirs.


Servicing is our other great affordability measure. From a financier’s perspective the question of whether or not someone can afford a particular franchise (or anything at all) is usually wrapped up in what lenders broadly refer to as ‘servicing’. At any given time of day, in banks and finance companies across the country, grey haired and bespectacled risk assessor types can be found shuffling through page after page of carefully prepared loan applications, ignoring almost everything written upon each page, before looking up and asking THE question “Does it service?” I jest of course, we stopped using paper long ago, we peer over computer screens these days and some of us are much less ‘banky’ than others, but in some form the question “Can they afford to pay all their bills and repay our loan?” is definitely still being asked.

This might seem like the simplest of calculations, income – expenses = profit, right? Sure, but there are lot of what if’s and maybe’s that go into that question. Firstly, for a new business almost every component of your financial forecast will be an assumption, your best guess as to what things will cost. You might not have chosen premises yet, so rent will be an assumption. You might not have hired staff yet, what if you have to pay more to get the people you need? What about income? Hopefully you know how many customers you need, or how many sales you’ll have to make, and what it will cost you, but all of it is still your best guess. Your lender might test your assumptions against other similar businesses, maybe even against other franchises in the network, but your future as a franchise owner is still somewhat unknown.

Generally, your lender is going to want to see that your business will generate enough income to pay its bills (including taxes) and have enough left over to make your loan repayments. Remember also that if you’re going to be working in the business the lender is probably going to want to see that you can draw a living wage (whether through profits or as an employee).

Tip: If you’re retaining other external sources of income don’t forget to highlight this when applying for finance.

Bring it all together

Various tools available to help you understand how all these pieces fit together, and to make sense of them for your own purposes (as well as presenting them to your lender when you’re ready). A good financial forecast template is a great place to start (we provide one to download from our website under “Customer Resources”) or your prospective franchisor may have their own, tailored to their particular network. Another great tool is what we refer to as a Cost & Funding Scenario, which sets out all the different types of expenses that are likely to be incurred in setting up a business, and more importantly where all the money will come from to pay for them.If I can leave you with some parting wisdom though, cliché as it might sound, I’d say this. While all the tools, forecasts, and rules of thumb can give you some idea of whether or not you can afford a franchise, it’s your passion, energy, and ‘fit’ that will make the difference between survive and thrive. Start by looking for the right franchise for you, then come talk to one of us bespectacled banky types about what it will take to bring it all together. You might be pleasantly surprised.

Any advice provided by CFI is general in nature and does not take into account your specific requirements or circumstances. CFI recommends obtaining professional legal and financial advice before undertaking any material business transaction, including obtaining finance.

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