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3 Ways to Fund Your Franchise (and 3 Ways You Should Not)

There are numerous options available to fund a franchise. Careful evaluation and management of these options should see you on the path to commercial success and wealth.

Standard Bank

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Establishing a business requires the investment of a great amount of time, effort and money. Most potential franchise owners do not have the capital needed to launch and run an enterprise effectively, and therefore rely on borrowing.

“For many, the opportunity to launch a business is created by a pension or provident fund payment or, very commonly, from retrenchment cheques when leaving the corporate world,” says Ethel Nyembe, Head of Small Enterprises at Standard Bank. “There are, however, other, more conventional ways of finding finance.”

Related: Build your Business Legacy through Succession Planning

Below, Nyembe suggests and explains the more established methods of funding a commercial enterprise, and which approaches to avoid.

1. Friends and family

“Many potential franchise owners turn to family and friends for finance,” says Nyembe. “This is one of the most common forms of financing a business, but should be undertaken with caution. Family relationships can be tested and even destroyed if the undertaking does not thrive as planned. Even though franchises have a much higher success rate than start-up SMEs, there is no guarantee that they will prosper.”

Two factors should be considered when approaching family or friends for loans:

  • The unstructured nature of family loans can cause future problems. Often, money is lent on the understanding that it will be repaid – with or without interest – but no repayment date is set. This can lead to resentment on the part of the lender and disputes.
  • If loans are accepted from a number of family members, keeping track of the repayment terms for each could be challenging. It is therefore important that all agreements are put in writing.

2. A business partner

Finding a business partner to invest in the franchise and take a stake in its future is a viable financing alternative.

“A partner should share your values, passion and determination to make the franchise succeed,” says Nyembe. “All aspects of the partnership agreement, share allocation and profit sharing should be placed in contractual form, so that future misunderstandings do not occur.”

Ethel Nyembe

Ethel Nyembe, Head of Small Enterprises at Standard Bank

3. Loans

Financing a franchise through debt equity (a business loan) is often the best option, as there are a few valuable advantages:

  • The banker will probably know the franchisor, the brand and the history of the organisation.
  • The bank may already have an association with the franchisor and understand the fee structure required.
  • The advice you receive will ensure that there are no ‘unpleasant surprises’ waiting, regardless of whether the franchise is an established outlet or a proposed new outlet.

Although banks are in the business of lending money, the potential franchisee must understand that they are also concerned with minimising risk. When approaching a bank for funding, Nyembe says you must realise:

  • It is unlikely that any bank will agree to supply 100% of the funding required.
  • The more money you have committed to your venture, the more likely it is that you will get a loan. Banks are more comfortable to grant loans to people who are committed to their businesses.
  • Security is important. Providing a bank with security for the loan in the form of assets or sureties (people who agree to pay debt on your behalf) increases the likelihood that loans will be extended.

Says Nyembe, “The advantage of bank loans is that repayment terms and interest rates are agreed upon up front. This helps to regulate cash flow, as the repayments will be calculated on a monthly basis for the period of the loan.”

There are also several methods of financing that should be avoided when seeking funding, cautions Nyembe. These include:

1. Excessive borrowing

One of the most common mistakes made by franchisees is to borrow the funds to make up the unencumbered deposit required by franchisors. Franchisees should remember that their business is not going to be profitable immediately.

They are bound to experience slow months especially at the beginning of their business venture. In this instance, the higher their loaned percentage of capital, the more pressure there is on the business to repay the loan instead of being able to redirect any profits back into the business to build equity.

2. Double indebtedness

Although there are many forms of loans that the franchisee can have access to, they do come with their fair share of pitfalls.

Double indebtedness is the result of a franchisee using a loan to fund the unencumbered portion of their contribution as well as taking out a loan to finance the remaining portion of the capital needed to start the business.

Related: How to Build Skills, Loyalty and Profits With Staff Training

Utilising a personal credit card can prove to cause more harm than good as this will create a secondary, more costly debt for the franchisee. Servicing two loans at the initiation of the business can place the business and the franchisee under undue strain.

3. Raiding your home loan

Servicing the unencumbered portion with one’s home loan is risky as one could lose the equity in the house, extend the repayment term, and have to pay a higher amount on the mortgage.

This will result in a high personal debt as well as a high business debt if a business loan is utilised by the franchisee. With the rise of interest rates, a franchisee’s house and business could be at stake.

“Starting a franchise operation with massive debt hanging over you is not advisable,” says Nyembe. “If the franchise outlet is new, it could take several months before the business is established and the turnover is able to finance operations and costs. It is during this period that you and your business will be most vulnerable to financial failure.

“Avoiding this means doing your homework, knowing exactly how much money you will need and then financing it in a responsible manner.”

Standard Bank SA is the largest operating entity of Standard Bank Group, Africa’s largest bank by assets. Standard Bank SA provides the full spectrum of financial services, with more than 720 branches and over 7 100 ATMs. Independent surveys of customer satisfaction consistently place Standard Bank at or near the top of their rankings. The personal and business banking unit offers banking and other financial services to individuals and small-to-medium enterprises. For further information, go to community.standardbank.co.za

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5 Healthy Habits Businesses Should Adopt In 2019

Here are five beneficial habits your business should adopt in 2019.

Fedhealth

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When we think of adopting healthy habits, we usually think in terms of our bodies or our personal lives. But as an entrepreneur, shouldn’t you be adopting healthy habits for your business too? After all, like our bodies, businesses perform better – and are better able to withstand the occasional storm – when they’re functioning at an optimal level. So how does the concept of “health” translate in a small business context? Here are five beneficial habits your business should adopt in 2019:

1. Streamline your cash flow

You can have all the impressive clients you want, but if they’re not paying you on time (or at all), your cash flow will suffer – making it very hard for your business to function. Similarly, if you don’t strategically keep money in your business (for example by only paying bills when you need to), you can also run into trouble. Since cash flow is so important to a healthy business, take a high-level view of the money that’s coming in and the funds going out on a regular basis. Then, make sure that the two work in tandem, so that your bottom line stays as stable as possible.

2. Apply the KonMari method

Author and organising consultant Marie Kondo has exploded in popularity in recent years, and her 2011 book, “The Life-Changing Magic of Tidying Up” has been published in 30 countries. In a nutshell, the KonMari method is all about keeping only those things that spark joy in your life – whether it’s clothes, books or furniture. The result, Kondo believes, is a happier, calmer, more contented life.

You could apply this principle to business too. For example, which clients are more trouble than they’re worth – and conversely, which ones give you joy that you could find more ways to work with? Or, what services does your business provide that your heart’s really not into – and which ones are you passionate about? This mindset could apply to almost any business context, from a branding refresh to streamlining your service offering, or even just clearing the clutter from your office.

3. Use tech to get organised

Admin tasks can often be overlooked in a small business, because employees are typically wearing so many different hats: they’re salespeople, account managers, the HR department and more. But if you let the admin slip, your business can suffer, and this can spill over into your dealings with customers. Luckily these days, there’s lots of tech available to help you with almost every aspect of business administration, from invoicing and budgeting, to timesheets and project management. Most of these are available at a minimal cost (or even free), so they don’t require a huge outlay. Making this small investment can pay for itself many times over in helping your business run more smoothly.

4. Get the pipeline rolling

The key to keeping your business healthy is to keep the momentum going, which means keeping the flow of new customers. Even if you’re in a comfortable position right now, you never know what’s around the corner in terms of your industry, new competitors or the economy in general. That’s why it’s important to keep stoking your sales pipeline by looking for new leads all the time. Be proactive: go to networking events, ask to be introduced to companies you want to work with, or even just try and upsell to existing clients.

5. Keep your people healthy

When it comes to the health of yourself and your employees, the personal and business worlds definitely merge. After all, if you or your employees are constantly sick, they can’t be giving their best to your business. Several medical schemes, such as Fedhealth, have a medical aid offering specifically for corporates and their employees. Besides helping to lower absentee rates and improve productivity, you’ll also boost employee morale by the improved benefits you’re offering.

By adopting just a few healthy habits within your business, you’ll make sure that in the long run, it’s as successful as it can be. It works the other way too: A successful business will have a positive impact on you as the business owner – you’ll enjoy going to work and be happier in general, which will go a long way to keeping you healthy too.

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Company Posts

4 Ways to Stop Worrying in 2019

If you’re a bit of a worry-wart, you have to acknowledge this and get proactive about managing your stress, anxiety and worrying levels. Here’s how.

Fedhealth

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What if I can’t complete that piece of work in time? What if my home gets burgled while I’m on holiday? We all worry – some people more than others. A few of these worries are genuine concerns, but most are completely out of our control and are most likely never to materialise.

But still, they occupy our minds. And with the digital world now occupying even more of our time, we’ve been given even more material to worry about. Famines in far-away countries, children orphaned by a flood, if we simply turn on our TVs or look to social media, we can become completely overwhelmed by what we see. And it’s making us all desperately unhappy.

So, what do we do? If you’re a bit of a worry-wart, you have to acknowledge this and get proactive about managing your stress, anxiety and worrying levels. Here’s how:

Monitor and limit social media

social-media-management

We all know our phones are an addiction. And scrolling through Twitter or Instagram, you can compare your life to everyone else’s and add another huge worry to your ever-growing list: I’m not good enough/my life sucks. Which is why there’s a growing trend among Generation X-ers (and even some Millennials), to quit social media altogether.

“It was like breaking an addiction for the first few days, where I felt I was missing out, but after a few weeks I realised that the world carries on, and I was still in touch with those people I actually wanted to connect with. I felt lighter and happier,” says Caryn White*, a mother-of-two and small business owner. If you can’t quit social media for work reasons, then take it off your phone, and only access it on your desktop at specific times of the day.

Limit news

We’re not advocating sticking your head in the sand: just limit which channels you absorb news from, and how often you do it. The last thing you need is to open up your phone on waking up and read about the latest catastrophe, which you are powerless to do anything about.

Pick a few trusted news sources and check them at specific times. Avoid the news on the radio in your car; rather listen to fascinating audio books or podcasts that lift your mood instead of making you worry.

Assumption or fact?

This simple concept is incredibly helpful when faced with a worrying situation. Your child has a strange rash, you’ve Googled it and you’re pretty sure it’s chickenpox. Now the whole family is going to get it, you’ll miss work, your boss will be angry, and you may lose your job. Is the fact that your child has chicken pox an assumption or a fact?

Is losing your job a fact or an assumption? They’re both assumptions. So, take your child to the doctor, get a proper diagnosis and then take the next steps from there (a good medical aid can also help ease the stress of the financial cost of doctors’ visits). This approach is a simple way to deal with worries that start to spiral out of control in your mind.

Write them down

Worrying can seem insurmountable if it’s all in your head. Instead, try this strategy from Qualified FAMSA Counsellor Lynette Blomfield:

  1. Take a few deep breaths with your eyes closed, until you calm down.
  2. Once you’re calm, write down the five most stressful things on your list. It could be increasing expenses, like a huge jump in medical aid costs per month.
  3. Brainstorm what you could do to change or eliminate the worry/problem (maybe you can move to a medical aid company that charges less each month?). If necessary, ask a good friend or colleague for advice.
  4. Focus on making progress, not ticking all your worries off and striving for ‘perfection’.
  5. Stay on course and come back to your list regularly.

Dealing with worrying is about being proactive. You’re the only one that can begin the process of reducing anxiety, so now’s the time to take some steps. If you don’t know how to begin doing this on your own, it may be best to see a qualified counsellor or therapist to get you started.

*name has been changed

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Cash Flow

Benefits Of Automated Cash Management

Every entrepreneur knows that cash is the lifeblood of a business, but few realise that the way one manages cash, can be the difference between success and failure.

Cash Connect

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Automated cash management has become a vital component of every cash-centric business, particularly in the retail trade. As much as the use of credit cards and online banking is encouraged, consumers remain sceptical and nervous of internet fraud and cybercrime and continue to prefer hard cash as the primary means of transacting.

The days of physical cash are not numbered. Current cash in circulation is approximately R140 billion, having grown from R119 billion in 2014, according to the South African Reserve Bank and according to a recent banking report, cash represents close on 90% of all transactions in South Africa.

If you run a business, some of this cash will find its way into your cash register (or, heaven forbid, the envelope you hide in the fridge until you make the trip to the bank). As a business owner, it is your responsibility to keep your cash safe, not just in the interests of profitability, but in the interests of the welfare of staff and customers who could be caught in the cross fire of armed robbers who almost always, get to know what you have been up to!

According to Richard Phillips, joint CEO of Cash Connect Management Solutions, cash automation is the way to go. “Automated cash handling saves money and time, allowing retailers to focus on their core business and greatly improves their risk profile,” he says. And don’t think your enterprise is too small to automate, as cash, whether small or large in volume, remains high on the criminal agenda.

But the real commercial advantages of cash automation are often hidden by safety and security considerations. The advantages of an automated cash handling solution are and should, do much more than giving your cash a safe ride to the bank. Just have a look at what the Cash Connect solution, arguably the most advanced of its kind in the local market could do for you:

1. Increased business efficiency

Bill Gates once said that automation applied to an efficient operation will magnify the efficiency. It is certainly true for automated cash management. It’s fast, accurate and error free. It eliminates all staff touch points associated with manual reconciliations and banking, which gets rid of shrinkage and double count supervision. It lowers insurance and other overhead and back-office costs, along with your exposure to crime, both in store and en-route to the bank.

2. Improved cash flow

With the right solution, your cash will reflect in your bank account on the same day that the cash-in-transit company collects from your premises. Cash Connect goes even further with its Instant Access feature, which allows access to the cash while still in the vault, converting the retailers’  cash into value whenever they need it.

3. Business continuity

Cash Connect guarantees the cash from the time it is deposited into the cash vault, whilst in transit and until the cash reflects in your bank account. This means that from a cash flow point of view, your business can not only survive most crises, but that business continuity is guaranteed.

4. Cost savings

In a manual cash handling environment, the combination of all the elements required to give effect to realising value in one’s bank account will vary with the actual monthly cash turnover; But on R1,5 million of cash receipts a month, the cost will be somewhere in the region of 135 basis points.

A corresponding integrated automated cash management service will cost in the region of 70 basis points.

As a matter of interest, card transactions cost the retailer anything between 300 and 500 basis points – reinforcing why, for the retailer, cash is the preferred medium of payment.

5. Access to alternative funding options

Imagine applying for a business loan, getting funding approval in one hour and having R1,8 million paid into your bank account within 24 hours. Far from a pipedream, this is what Cash Connect recently did for one of its retail supermarket clients under its Cash Connect Capital offering. You too can get fast, flexible, hassle-free, and unsecured growth finance when you need working capital to boost your business.

Having grown Cash Connect from an entrepreneur’s start-up to the success it is today, the Cash Connect team remains driven by the desire to empower and enable South Africa’s SME community and retail sector, by creating a trading environment that takes businesses from a place of safety to a place of growth.

And in today’s modern world, that is exactly how entrepreneurs should think about cash management solutions and how they can improve business efficiency and cash flow.

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