Unfortunately, when it comes to securing funding, many would-be franchisees come unstuck but this need not be the case. Franchise funding is available to applicants who present a compelling business case and, most importantly, select the right bank. This article explains.
People who are unsuccessful in their attempts to raise loans tend to blame the banker for their misfortune but this is neither helpful nor fair. Banks are in the business of lending out money – unless they grant loans, they won’t stay in business for very long. However, they also have an obligation vis-à-vis their depositors and shareholders to ensure that these loans will be repaid with interest, in full and on time. The requirements of the National Credit Act are another reason why bankers are forced to tread carefully.
Bankers find it difficult to assess the risks linked to funding a new business venture because there is no track record. This is where prospective franchisees of recognised brands score. The brand’s track record makes the new business’s success chances more predictable, but only in the eyes of bankers who truly understand franchising.
The all-important own contribution
To become a franchisee, you need to accept the sector’s rules. One of them is that you cannot realise your dream of owning a franchise without investing some money of your own. There are several good reasons for this, with the following standing out.
- Accumulating capital requires discipline. Having done so demonstrates to the banker that the potential borrower knows how to deal with money responsibly. This is one of the reasons why bankers will want to know the origin of available funds. For example, lottery winnings are not necessarily proof of financial discipline. And “soft loans” – money advanced by family and friends to assist the aspiring franchisee – would have to be underpinned by a watertight loan agreement that protects the rights of the bank and the business, in that order.
- Taking a new business to the point where it generates a positive cash flow takes time. A franchise may achieve positive cash flow sooner than would otherwise be the case but it will take time nonetheless. In the meantime, loans need to be repaid. Should the business be funded with borrowed money only, the amount repayable each month could cripple the business’s cash flow and jeopardise its survival.
- Unless the owner’s own money is at stake, his/her commitment to making the business successful will be suspect. The moment the going gets tough, he/she might be tempted to pack up and leave. The Americans call this “having skin in the game”.
- The banker is not the only one who will insist on a cash contribution. Responsible franchisors know from experience that a shortage of money can derail the best business during the all-important start-up period.
How much own cash do you need?
The total investment required to start a franchise varies widely; it depends on the industry sector and the size of the business. As a rule, a prospective franchisee is expected to contribute between 30-50% of the total investment but this is not cast in stone. Variables that will be taken into account include the applicant’s financial track record, business experience and the quality of security on offer. Other critical factors are the standing of the franchisor’s brand, the sector’s overall health, the quality of the available site and the business’s perceived ability to generate a positive cash flow almost from day one.
The combination of an approved franchisor and a qualifying applicant could lower the dual hurdles of own contribution and surety requirements quite considerably. Loan guarantees backed by Khula can also be arranged.
In this context, we need to remember that the term “franchise” is not a magic wand, not all franchises are created equal. For this reason, Nedbank’s National Franchise Unit has created a database of approved franchisors who adhere to the highest professional standards in all respects. They operate thriving businesses underpinned by solid systems and processes and their legal documentation conforms to the requirements of the Consumer Protection Act (CPA). Most importantly, they have the necessary infrastructure to offer franchisees extensive initial and ongoing support. Prospective franchisees will be well advised to give preference to these franchisors.
Preparing a winning loan application
The quality of the loan application plays an important role in the lending decision. The banker will want to see the applicant apply for the correct type of funding in the correct amount and have a clear idea how the loan, if granted, will be repaid. The next article in this series will deal with this topic in detail.
Should you wish to find out more about Nedbank’s loan products in the interim, speak to the Business Manager at the Area Office nearest to you; contact details can be found on www.nedbank.co.za or visit your nearest Nedbank branch.