Your personal contribution plays a pivotal role in the world of franchising. But what exactly is a personal contribution? It’s the capital or loans you invest from your own pocket into your business.
In the business realm, one word holds immense significance: trust. To establish your business successfully, you must inspire trust in various stakeholders, including your banker, suppliers, customers, partners, and employees. The key to building this trust is by demonstrating your unwavering belief in your entrepreneurial venture.
The Essence of Confidence
Imagine this scenario: You approach a bank for financing, yet you don’t exhibit your commitment to taking the risk of investing your own capital. How can you expect them to back your business if you don’t? How can you persuade suppliers that their invoices will be paid on time if you don’t show your own financial commitment? Likewise, convincing customers to purchase your products or services hinges on the assurance that their money is safe.
Even attracting talented employees to your venture depends on the guarantee of a steady paycheck.
Determining Your Required Personal Contribution
To ascertain the necessary personal contribution, you must first create multiple versions of your business plan, projecting the first couple of years’ financials. This allows you to construct a cash flow plan, identifying your financial needs based on incoming and outgoing cash flows.
In the UK, the British Business Bank can fund up to 100% of a small business loan, with a maximum of £25,000, without the need for personal equity. Traditional banking institutions typically work on a ⅔ split – one-third personal equity and two-thirds financing. Consequently, you can determine the equity amount you need to invest.
Sources of Your Personal Contribution
Your personal contribution can be sourced from your own funds or loans from friends and family who believe in your project. The nature of your profession and the scale of your project will also influence the required personal contribution. If your business involves owning property and significant stock investments, the contribution will be larger.
Evaluating Risk Tolerance
As an entrepreneur, you’ll need to redefine your relationship with risk. Defining your personal threshold for risk is crucial. Engage in candid discussions with those close to you, especially those who will provide honest feedback, as this will help determine your comfort level with risk.
The Role of Personal Contribution in Franchising
The importance of your personal contribution in franchising cannot be overstated. It boils down to building trust. Creating a business without any personal investment is seldom feasible unless your idea generates instant and substantial profit. A franchisor will require you to demonstrate the viability of your project, justifying their investment in providing you with their concept and support.
Is the Amount Fixed by the Franchisor?
No, the franchisor will suggest a personal contribution needed for financing your business. However, each project is unique, and your personal situation, guarantees, project scale, and focus area will influence this contribution. It’s essential to heed your potential franchisor’s advice, as they possess invaluable experience and insight into launching new franchisees.
Utilising Your Personal Contribution
Your personal contribution serves several critical purposes:
- Creating your business: Depending on your chosen business structure, you’ll need to deposit capital into your business bank account to fund its operations and development.
- Building trust with investors and lenders: Your personal contribution convinces them to invest in your business.
- Partially financing your business launch: Not all of your personal contribution needs to go into capital; it can also serve as a loan to your business. Additionally, your banker may provide an investment loan and open a cash credit line to address temporary cash flow challenges.
At Raison Home, the ideal personal contribution ranges from £7,000 to £10,000, depending on your overall financing requirements. This presents a marginal calculated risk, given the potential for substantial turnover and profits.