How much deposit do you need to buy a franchise? Equity, LVR and security

• Your deposit, or equity contribution, is the share of the all-in cost you pay with your own money.
• Loan-to-value ratio (LVR) is the loan as a percentage of the value of the asset it buys, calculated by dividing the loan by the asset's value (Moneysmart).
• Part of a franchise's cost, such as the fee, training and working capital, isn't a physical asset that could be sold to repay a loan.
• Security can be property or business assets. With a secured loan, the lender can take the security if you don't repay (business.gov.au).
• A guarantor may have to repay the whole loan plus interest, and Moneysmart warns that business loans carry extra risk.
• Rules of thumb circulate online, but there's no official benchmark, so get each lender's requirements in writing.

• All-in cost: everything needed to open and survive the ramp-up, including the franchise fee, fit-out, equipment, vehicle, stock, legal and accounting advice, training, launch marketing and working capital.
• Equity contribution: the part of the all-in cost you fund yourself, from savings, the sale of assets or a family contribution.
• Deposit: often used loosely for the same idea. For a franchise, ask each lender whether it measures your deposit against the whole project cost or against particular assets.
• Loan-to-value ratio: the loan divided by the value of the asset. Moneysmart's example is a $450,000 loan on a $600,000 house, an LVR of 75%.
• Security: property or other assets pledged so the lender can recover the debt if you default.
• Guarantee: a promise by you or someone else to repay the debt if the borrower can't, for example a director guaranteeing a loan to their own company.
• Working capital: cash to pay wages, rent, stock and loan repayments until the business pays its own way.

The figures below are invented to show the calculations. They are not lender norms or quotes.

1. All-in cost: $250,000, made up of a $40,000 franchise fee, $150,000 of fit-out and equipment, $10,000 of stock, $15,000 of legal, accounting and training costs, and $35,000 of working capital.
2. Physical assets: fit-out, equipment and stock total $160,000. The other $90,000 (fee, advice, training and working capital) can't be sold to repay a debt.
3. Loan offered: $150,000. Your equity is $100,000, or 40% of the all-in cost.
4. Measured against the physical assets, the same $150,000 loan is about 94% of their $160,000 cost, which helps explain why a lender may ask for extra security.
5. Extra security: say your home is worth $800,000 with a $400,000 mortgage. Adding the $150,000 business loan takes the debt secured on your home to $550,000, an LVR of about 69%.
6. The consequence: your home is now at risk if the business can't repay, which is why independent advice matters before you pledge it.

Lenders don't publish one franchise deposit rule. business.gov.au's loan guide lists what you should be ready to show.

• Your income, expenses, debts and cash flow, and the maximum repayment you can afford.
• What assets you can offer as collateral, and who will guarantee the loan if a guarantor is needed.
• A business plan and financial forecasts for the franchise.
• Proof of identity, lease agreements and your personal financial information.
• Whether you want a secured or unsecured loan. For an unsecured loan, the lender will usually look at the business's financial health instead of your assets.
• Whether you need all the money upfront, or would rather draw on it only when needed.

This is where most of the personal risk sits. Moneysmart's guidance on going guarantor sets out the main dangers.

• A guarantor may have to repay the whole loan plus interest if the borrower can't.
• Business loans carry more risk: business income can change fast, and responsible lending obligations don't apply to business loans.
• If the guaranteed loan isn't repaid, the lender may record a default on the guarantor's credit report.
• A lender may decline future borrowing because of a loan you've guaranteed, even while repayments are up to date.
• Sometimes a guarantee can be limited to part of the loan, which may limit what the guarantor owes.
• Moneysmart recommends independent accounting and legal advice before signing.
• Family members asked to guarantee your loan or pledge property should get their own advice, separate from yours.

• Savings you can document over time with statements.
• Equity in property, borrowed against your home. This adds to the debt secured on your home, with the same risk as pledging it.
• The sale of an asset, such as shares or a vehicle.
• A redundancy payment. Keep part of it aside for living costs during the ramp-up.
• A family gift. Document it in writing so you can show a lender whether it's a gift or a loan that must be repaid.
• Super, generally only after you meet a condition of release, such as turning 65, or reaching your preservation age and retiring (ATO).
• Vendor or franchisor finance, where offered. Read its terms as carefully as you would a bank loan's.

The ACCC's information statement asks prospective franchisees how much working capital they'll need to get established, and how long it will take to break even. Budget for both before you settle on a deposit.

• Working capital pays wages, rent, stock and loan repayments while sales build.
• Your own living costs also need funding until the business can pay you.
• Ask each lender whether it counts working capital as part of the project it will fund, or expects you to fund it.
• Putting your whole buffer into the deposit leaves nothing for a slow start.
• business.gov.au says an overdraft can bridge short-term cash flow gaps but shouldn't be relied on for capital purchases or long-term financing.
• Model the ramp-up month by month with the franchise break-even calculator.

• I know the all-in cost, including working capital, from the disclosure document and quotes.
• I can document where every dollar of my contribution came from.
• I've calculated the LVR on any property I might offer as security.
• I understand what a personal guarantee would make me liable for.
• Anyone guaranteeing my loan or pledging property has had independent legal advice.
• I've kept a separate personal buffer for living costs.
• I've asked at least two lenders, in writing, what they'd require for this franchise.
• My accountant has reviewed the funding structure.