Financing Your Studio

Perhaps not surprisingly, the topic that comes up most frequently in discussion with potential franchisees is money. Most people won’t have all the funding they require for their studio readily available, and the question of how best to finance their business is very much top of mind.

So in this blog we’ve looked at some of the points to consider when thinking about funding your Studio Pilates franchise.

Managing your expectations

Before we get going, it’s important to make sure that you’re starting with realistic expectations.

It’s true that your chances of getting approved for finance are  better for a franchise than for a start-up. That’s because a  franchise is essentially a ready-made business, which is based on a proven operating model and methodology for success, which means you can hit the ground running and minimise risk. You may even get a better interest rate, as your lender knows there’s a high chance you’ll be successful and so you’re more likely to be able to repay your loan.

But don’t expect to be able to fund 100 per cent of your business through debt finance. Being overburdened with debt is one of the fastest ways to fail. So it is absolutely vital that you work out what a safe and responsible level of debt looks like, and set a realistic expectation of the right mix of debt and equity for your business.

Types of funding

There are essentially two categories of funding - equity and debt. And most franchises will be funded by a mixture of both.

 Equity finance is money put up in exchange for a share in the ownership of the franchise, often raised from financing a property. The cash savings that you will be putting towards the cost of the business count as equity finance, other sources might include family and friends, a business partner or other investor. In the case of an existing business it may also include your retained earnings. Providers of equity funds, known as equity partners, will enjoy the potential upside of the business through profits and capital growth, as well as bear the potential downsides if the business doesn’t do well.

The second category, Debt finance, is typically made up of funds borrowed from a lender outside the business, and will be paid back with interest over time. It usually comes from banks and other financial institutions, but it could also come from family or friends as a loan.

Getting professional advice

Before you start the formal process of applying to banks and other financial institutions it’s a great idea to get some professional advice. This may include accountants, lawyers and business advisors who can assist with determining what structure you own and operate the business in, understanding your obligations as a business owner, reviewing agreements, tax planning, pointing out the potential risks and helping with business plans to name a few.

Getting the right advice before you start your business can save you a lot of stress and money in the future and save you from making mistakes that you may not have even considered.

Applying for a loan

Franchise business loans include traditional loans offered by banks as well as alternative finance solutions from specialist lenders. You should do your own research into lenders available, but where it’s in line with local regulations, Studio Pilates can also direct approved franchisees to sources of finance and lenders who are familiar with the Studio Pilates Franchise business.

Regardless of how well established your chosen franchise is, you’ll still be subject to the usual underwriting and finance application process. The lender will assess your net worth and credit history, and you may be required to provide security.

Those looking to finance a franchise could usually get 50-65% of their studio’s total value. If you have assets (typically property) to offer upfront as security, your chance of approval increases. The lender will want to see your Business Plan to make sure you can manage comfortably and that you haven’t stretched yourself too thin by borrowing more than you can afford to repay.

Unlike standard business loans which can be set for 20 or 30 years, franchise loans are tied to the term of the franchise agreement, unless you are securing the loan with a property,

If you’re looking at finance for an existing studio, you’ll need to provide your bank with financials from the past 2-3 years, such as profit and loss statements, business tax returns, and business bank statements.  But when you’re looking for finance for a new studio, your lender will be more interested in your business plan and personal experience to help them assess whether you have what it takes to run a profitable business.

Understanding what lenders want to see and being well prepared will give you the best chance of securing funding.  After your initial application, make sure you get a very clear indication of the supporting information your lender requires, then provide exactly what has been requested. This will make for a much smoother and faster application process.

Typical requirements from a lender include: an application form, forms of identification; a Business Plan with financial projections; a statement of personal assets and liabilities, and a schedule of commitments. Make sure that the information you provide is accurate, and up to date, to give yourself the best chance of approval.

How will lenders assess your application?

According to Business Franchise Australia, lenders will typically be guided by a set of credit principles known as ‘The 5 Cs of Credit’ when assessing the information you provide.

These are:

1. Character: this is all about you, your history and reputation, and your willingness to repay the debt. Not only will lenders use traditional methods like credit reporting agencies but increasingly online searches can be a source of information too.

2. Capacity: this principle is more about your ability to repay, rather than your character. This may cover income, expenses, and other debt obligations.

3. Capital: your overall financial position. This means your net asset position and whether those assets can be turned to cash if things got difficult.

4. Collateral: this refers to the security that you could put up to secure your finance. This could be your home or it could be the assets of the business. It is also important to consider the implications of providing Director’s Guarantees and Personal Guarantees as a commonly requested form of security.

5. Conditions: this relates to all of the terms upon which the finance may be offered to you and may include the interest rate, fees, and length of the contract.

When preparing your business plan and providing other supporting information, keep these principles in mind.

Next steps

If you’re interested in a franchise and would like to know more, call us or email us on - joinus@studiopilates.com -  and have an initial discussion with our Franchise Team.

We can answer any questions you may have and advise you on the next steps to take to start your journey - from selecting your location to commencing the assessment  to join our rapidly growing global family.

Read more blogs about opening your own Pilates Studio here.