How are you going to finance your first franchise purchase?
New franchises are opening every day, and that money has to come from somewhere. It isn’t easy but there are various ways of coming up with start-up capital.
On Your Own
1. Refinancing your home or taking out home-equity loans
This is fine if the franchise you choose is so inexpensive that you can cover the franchise fee and total investment (rent, equipment, supplies, employee salaries, your own living expenses and advertising) yourself. But should you need to borrow money later, your lender will want you to put up collateral, and a fully mortgaged house doesn’t qualify. Finance experts suggest you borrow only a portion of the available equity, and leave at least 25% of your home’s value intact.
2.Severance packages or savings
Down-sized executives often use their severance packages or savings to get started. Retirees without separate savings can tap into their individual retirement accounts without a tax penalty. This option can be really tricky, and should not be attempted without play-by-play assistance from an accountant.
Through a loan
Prospective franchisees who qualify can borrow start-up capital through a loan. Banks are usually open to granting loans to start-ups who are purchasing loans as they are buying into proven concepts. Most banks have a dedicated franchising unit which can also provide useful information before purchasing your first franchise.
Once a bank has had a good experience with a franchise loan, it tends to loan money to more franchisees from the same concept. Begin your financing search by talking to your potential franchisor about banking relationships and asking existing franchisees where they obtained financing.
But if the system you choose has no strong lender ties, you’ll have to build a personal relationship with a local lender.
Friends & Family
If you have spotty credit, are dealing with a new franchise company with no earnings history, or don’t own a house or even a Harley, it’s unlikely a bank will loan you money. The last stop on your financing hunt is Mom, Dad, Uncle Dan and Jim, that high-school loser who made a killing in tech stocks.
Friendships and families can be torn apart by such transactions, if not handled correctly. Here are some tips to keep your relationships intact:
- Put together a business plan, including a two-year monthly forecast of your sales and expenses. Include what you’re asking of your investors, what they’ll get in return, and when they’ll get their equity back — probably not until you sell, qualify for a conventional loan, or attract the attention of one of those multimillion-rand private-equity firms.
- Don’t build up their expectations; explain all the risks and never take money from a relative or friend who can’t afford to lose the entire sum.
- Have an attorney who understands securities draw up a formal contract. Then if something goes wrong, it won’t come as a big shock — and you can still sit down together at holiday meals
10 Franchise Financing Tips:
- Talk to your franchisor before searching for outside financing; get approved or pre-qualified.
- The most common source of start-up capital is friends and family. Use them.
- Seek out lenders that understand not just business but franchising as well.
- Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.
- Neatness counts. Fill out your credit and loan applications clearly. Typed is better.
- Don’t weigh down your loan application with attached documents.
- Don’t exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.
- If you lack liquidity, find a partner with money.
- Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.
- Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt.
The Future Of Franchising Looks Smaller (And Fancier)
Franchises are adding smaller locations and reduced menu options, as niche markets emerge, to attract the customer of the future.
As the owner of a thriving franchise, you’re well aware of the fact that fluctuations in the world economy has both negative and positive effects on business. When it comes to your successful franchise, tough times could mean adopting new trends or seizing gaps, potentially resulting in a new franchise concept you wouldn’t have otherwise thought of.
“The buzz word in global franchising is ‘flexibility and adaptability’,” according to the Franchise Association of South Africa (FASA). “Whether a result of a need to inject some life into stagnant franchise brands or as a result of the new world order brought about by the recession, franchising is embracing alternative and options in a big way.”
You can do this by either devising innovative areas to franchise or allowing more flexible ways for franchisees to operate to help with their bottom line. FASA has earmarked these as some of the biggest franchising trends in 2018 and beyond:
Smaller, more cost-effective franchise models
When franchisees don’t have high franchise fees and start-up costs to worry about, they can focus more on what customers want, and deliver. The added benefit of smaller spaces include having fewer employees and reasonable rental.
Among the new frontiers in franchising are the food court losing its legacy as the preferred setting for food franchises, as service stations increase in popularity in the industry. A number of brands – like Steers, Debonairs and Mugg & Bean On-the-Go outlets – are co-locating with major fuel retailers to create fully-integrated accessible centres.
Niche markets are offering one-of-a-kind franchises
“The opportunity to get in on the ground floor of a new franchise trend is also on the rise,” notes FASA. This could be offering a unique gourmet food experience in your outlets or a ‘green’ space of energy saving technology in your operations.
“Consumers have gained control of what they want,” says Morné Cronjé, head of franchising at FNB Business. “It is no longer about what you have on the menu, but how your product or service can be tailor-made to what a customer really wants.”
Founded just five years ago (2013), RocoMamas boasts over 60 franchise outlets, clearly responding to the essence of this trend –allowing consumers to build their own burgers without having to pay for items they’d rather leave out.
Stay ahead of the game
For long-term success, franchisors who want to expand their business should start exploring beyond present circumstances and current predictions.
“2018 will no doubt bring its challenges, however for every challenge there is a window of opportunity to explore. We are advising franchisors to scrutinise these trends carefully, it can definitely give them a boost for 2018,” says Cronjé.
As Consumers’ Tastes Change Can Your Franchise Keep Up?
More of your customers are eating in, and if you’re not packaging, portioning and pricing your food accordingly, they’re heading to a retailer that does.
It’s generally believed that it’s cheaper to cook your own breakfast, lunch or supper than to go out and pay a much higher price for the same food in your fridge at home. But today’s consumer’s live fast-paced lifestyles – so food is becoming more about convenience.
31% of 6 022 middle-to-high income South African earners surveyed by BusinessTech, put eating out and entertainment at the top of their list of things they’re most willing to cut their spending on in 2018 to save money. Research by supermarket giant Pick n Pay correlates, reporting an increase in customers buying quality convenience food, not just to entertain at home, but for dining at home.
Consumers are empowered by variety
You’ve heard about the ‘fast casual generation’, aka Millennials? They are demanding healthy, affordable eating experiences. But do you know how this affects the future of the food industry, and your business in particular – because they’re not the only ones adapting their lifestyles.
An increasing number of food brands and chefs are compelled to create complete ranges of new, convenient meal options that are not only packaged, portioned and precooked attractively, but affordable too.
The fastest growing sector of retail foodservice for the past four years has been the convenience store sector. Non-traditional avenues of distribution are growing, gobbling market share while establishing new patterns of consumption, price points, and customer loyalty.
Shoppers are becoming value-focused
A savvy franchise would acknowledge that although pre-packaged and pre-cooked convenience food isn’t a new trend among consumers and supermarkets, it is gaining popularity. “Some of the most notable trends in 2017 were an increasing shift to convenience foods as customers looked for both value and convenience,” says Pick ‘n Pay’s Head of Marketing, John Bradshaw.
Value for money and healthier food choices will continue to be top of the convenience food list for consumer in 2018, as more shoppers cut down on luxuries.
“We’ve seen significant growth in the number of customers looking for an easy way to enjoy a good meal without the cost of eating out,” says Bradshaw.
But he cautions that South African shoppers have always been value-focused, and while the most significant shift Pick ‘n Pay has seen is how all its shoppers, no matter what their income levels, are watching their budgets.
Maximise Your Social Media Reach This Holiday Season
Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.
It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?
You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.
Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.
Know your customers well
The first step to attracting customers and getting them to complete a sale is understanding their customer journey.
“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.
The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.
Master social listening
You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?
“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”
Related: 10 Laws Of Social Media Marketing
Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.
Try something new
50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.
Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.
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