Providing the cost of the franchise is relatively small, you might be able to negotiate a personal overdraft to raise the capital. Banks will only provide this facility if they know you will be able to repay the money (together with the interest charged on the overdraft). They make their decision based on the information they have on the financial transactions going through your personal accounts, your personal credit rating and your personal income and expenses that shows you can afford the repayments.
The interest rate on an overdraft is always linked to the prime rate, so be sure to review it annually. The interest on the amount you’ve overdrawn is calculated on a daily basis. This is then charged at the end of each month’s cycle. Other costs to consider on top of the interest payment are:
Some banks have a new rule when it comes to overdrafts. If you accept an overdraft facility that you aren’t using, be careful, they may charge you for not using it. Banks have started doing this because it costs them money to manage and monitor an overdraft!
Banks monitor overdrafts and usage of money on a regular basis as their aim is to reduce their risk. They can recall an overdraft with virtually no notice; especially if they feel you are putting them at risk. This is usually done in small amounts so that the limit decreases a little each month. Another course of action would be to convert a portion of the overdraft into a term loan, to enforce a gradual decrease of the debt.
If you have a credit card, this can offer a good means of financing a small franchise. Only use your personal credit card if business credit is unavailable and make sure to record the amount spent (including the interest charged for the credit) in the business books. The benefits of using a credit card are:
Your banking records and credit rating will impact on whether you are granted a credit card and how much can be borrowed. Only use your personal credit card as a last option. It is always better that the debt resides in the business rather than with you personally.
If you do not yet have a personal credit card, you can apply to your bank for this facility. They have access to your banking records and will use those to decide whether you can afford to repay any monies borrowed. Your banking records and credit rating will impact on whether you are granted a credit card and what the total amount is that can be borrowed. Only use your personal credit card as a last option. It is always better that the debt resides in the business rather than with you personally. Please read Understanding Personal Surety before taking out a personal loan for your business.
If you do use your own money to start the franchise, make sure you understand how to record this in the company books. For small items such as stationary, the company can reimburse you (provided that you have the payment receipts), but for larger amounts it will need to be recorded in the company loan account. If you need help with this, go to the Need Assistance section and you can be linked with an account or business adviser in your region.
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.