In an economic landscape still feeling the aftershocks of the pandemic and ongoing trade tensions, franchising continues to offer an attractive path to business ownership. But how do banks perceive franchise businesses, especially when it comes to financing? And what makes a franchise more likely to get a loan approved?
According to Phil Mowat, Managing Consultant at Ashtons Franchise Consulting, the appeal of franchising to lenders lies in its consistency and proven track record. “Banks like franchise businesses because they often have a proven business model that’s been running successfully across multiple locations before franchising,” he explains. “They see the success of existing franchisees, repeat customers, recession-proof models, strong brand reputation, and a reliable support team — all of which lower the perceived risk.”
Franchising: A more predictable bet?
In a market where traditional small business lending has struggled to bounce back to pre-pandemic levels, banks are increasingly favouring structures that reduce risk. The Q4 2024 Business Finance Review from UK Finance notes that while gross lending to SMEs has increased 13% year-on-year, it still lags behind pre-2020 benchmarks. Interestingly, the increase in lending has been concentrated among larger SMEs and businesses with more robust financial plans — something franchising often provides.
Franchise businesses tend to come with centralised support, brand awareness, and operational playbooks that help new owners navigate early hurdles. These qualities make banks more comfortable issuing loans, particularly in a cautious lending environment.
Phil Mowat confirms this perception. “Strong brand and customer reviews, as well as awards or industry recognition, also help,” he adds. “Franchisors with good management teams in place give banks more confidence that new franchisees will succeed.”
What franchisees should know about securing finance
Despite this favourable view, getting finance approved is far from automatic. “A common misconception is that if an application is submitted, it will be approved just because banks ‘like’ franchising,” Mowat warns. “Applicants still need to fully present their case, just like with personal finance — creditworthiness, planning, and preparation are crucial.”
He advises franchisees to come prepared with:
- A strong and detailed business plan.
- A realistic cash flow forecast.
- A good personal credit score.
- Willingness to offer security for the loan.
This aligns with UK Finance’s Q4 2024 insights, which highlight a growing preference among lenders for better-prepared applicants. In fact, while loan approvals rose 23% in 2024 compared to the previous year, average loan sizes for small SMEs actually dropped below pre-Covid levels, suggesting that banks are cautious about extending large amounts to newer or smaller ventures unless there’s a solid plan in place.
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Lending trends and what they mean for franchises
The data paints a mixed but encouraging picture. According to UK Finance, overdraft approvals surged by 47% in 2024, reflecting demand from businesses grappling with cost pressures and economic uncertainty. However, overall lending still favours medium-sized businesses — potentially those more likely to meet the detailed requirements that banks now expect.
Moreover, invoice financing and asset-based lending (ABL) remained relatively strong throughout 2024, especially among larger firms. These types of financing are particularly valuable for franchises with high upfront costs or large supplier networks, offering a way to unlock working capital.
But smaller SMEs — including new franchisees — still face hurdles. Many remain cautious, holding back investment while they monitor inflation, interest rates, and changing consumer behaviour. Franchisees hoping to buck that trend will need to demonstrate confidence and clarity in their projections.
Beyond the numbers: The importance of education
Both franchisors and franchisees often underestimate the work involved in securing funding. “It’s not just about showing demand — it’s about showing that you understand the business and have a roadmap for growth,” says Mowat. He sees a need for better education and communication around bank expectations, especially for new entrants to the sector.
Banks, for their part, continue to signal readiness to lend — especially as challenger banks increase their share of SME lending, now accounting for 60% according to the British Business Bank. This competition may be good news for franchisees with strong cases but also means traditional lenders may tighten their requirements to minimise risk.
What it means for franchisees
Franchising in the UK is still widely viewed as a lower-risk route to business ownership — but that doesn’t make it a shortcut to financing. As banks adapt to economic headwinds and stricter credit standards, both franchisors and franchisees will need to raise their game to secure the funding they need.
For prospective franchisees, the takeaway is clear: present a robust plan, understand the risks, and don’t assume that the franchising label guarantees funding. As Mowat puts it, “Like any borrower, franchisees must have their house in order.”
