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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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Accounting & Payroll

The Importance of Outsourcing Your Payroll

One of an organisation’s biggest overheads is that of salaries and wages. And yet, if these are not processed on time, it can negatively impact staff morale and create the impression that the company is not financially stable.

CRS HR And Payroll Solutions

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For a small business, payroll is normally the responsibility of an accountant or bookkeeper, but even administrators can sometimes be roped in to do the job, even though they have no expertise in the matter. This is where the value of outsourcing your payroll comes in.

When should you outsource?

  • If you want to grow your business but are not aware of ongoing legislative changes that could pose a risk to your company, then it is better to get professionals to assist.
  • Accountants and bookkeepers are not specialists and do not keep up with the compliance environment. If you outsource your payroll, you enable them to focus their core duties and not get bogged down by legislative complexities.

How to choose an outsourced service provider

Understandably, payroll is a sensitive subject dealing with highly confidential information.

This is often the last thing a small business owner wants to outsource. It is therefore vital that the company does its homework and researches the potential outsourcing partner thoroughly.

Instead of going with the first available service provider or the cheapest one, here are some questions to ask:

  • Is the service provider a one-man band and, if so, what backup resources are available?
  • Is the service provider a recognised payroll provider belonging to a professional body?
  • Do they have the necessary training and skills on payroll?
  • What does the service provider do to ensure it stays up to date with legislation?
  • How secure is the payroll data and can the service provider take on historic data?
  • How easy is it to recover your payroll data in the event of a disaster?
  • What value-adds can the service provider offer? These can include anything from leave management and third-party payments, to employee self-service, time and attendance management, and any other related human resource service.
  • Can they process salaries and/or wages hourly, weekly, fortnightly, or monthly?
  • Can the service provider accommodate your growth requirements if you open new branches?
  • Is the service provider able to assist with payrolls in other African countries, manage their currencies, and deal with their regulatory environments?
  • What processes are in place to ensure the timeous processing of payrolls?

The advantages of outsourcing your payroll

One of the most obvious benefits of going the outsourcing route is freeing up your resources to focus on your core strategic objectives. This ensures you provide quality of service and control costs while an experienced partner takes care of your payroll.

Here are a few other benefits:

  • Reduce operating costs.
  • Statutory compliance and consistent service delivery.
  • Access to the latest technology, as well as skilled and dedicated payroll resources.
  • Access to a secure, risk-free and confidential payroll environment.
  • Increased flexibility and responsiveness.
  • Streamlined internal processes and procedures.

Related: Thinking of Immigrating to America from SA? Now Is The Time

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Company Posts

Thinking of Immigrating to America from SA? Now Is The Time

More South Africans are looking to get their Green Cards with the EB-5 visa. Here’s why – and how you can use this opportunity too.

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South Africans are surging towards the popular United States EB-5 Immigrant Investment Visa programme ahead of possible price increases that will likely place the EB-5 visa programme out of reach for many, other than for the uber-rich.

NES Financial, the leading EB-5 financial brokerage in the US, has estimated a 600% increase in EB-5 petition filings from South Africans this fiscal year from three years ago.

Increasing applications for the US Investor Visa

Bernard Wolfsdorf, a US EB-5 lawyer and former South African, has filed more South African cases in the past year than he has processed in the past ten years.

“I think it’s the fact that the investment amount could soon increase soon from $500 000 to $1,8 million that is driving many South Africans,” he says.

However, Wolfsdorf, Past President of the American Immigration Lawyers Association, speculates that there are other factors, such as the stable US economy, excellent business environment, and outstanding educational opportunities that are enticing many South Africans to invest in the U.S.

“The currency swing has convinced many South Africans I speak to that foreign investment in the US makes sense,” he adds.

Assisting with understanding your US immigration options

The Tier 1 top ranked US immigration law firm, Wolfsdorf Rosenthal LLP has now set up a South African focused website and is regularly sending experienced lawyers to meet with South Africans and explain their immigration options.

“While on the one hand I am sad that many South Africans are choosing to leave, my hope is that, with global investment, many will continue to run and expand their South African companies and that the foreign investment will benefit South African trade and exports and create jobs locally,” says Wolfsdorf.

Other countries, such as China and Korea have many immigrants and they continue to drive trade with their ‘mother’ countries. “I expect to see many South African immigrants continue to develop trade and commerce with the US as this huge influx continues,” he says.

The Office of the United States Trade Representative confirms that US goods and services trade with South Africa totaled an estimated $18,9 billion in 2018. Exports were $8,4 billion; imports were $10,5 billion, creating a trade deficit with South Africa of $2,1 billion in 2018.

Some of the top imports from South Africa into the US include precious metal and stone; iron and steel; vehicles; and agricultural products like tree nuts and fresh fruit. However, the strong dollar greatly benefits trade and prices for many South African goods are high.

Why South Africans are immigrating to the US and not Australia

Other factors leading South Africans to choose the US is the fact that Australia and the United Kingdom have been less welcoming to immigrants recently, so while the US has been in third place as a choice, this is likely to soon change soon.

“In fact, Australia is becoming less and less friendly to immigrants on a personal level, with many Australians believing it’s time for its liberal immigration policies to end,” says Wolfsdorf.

“The country is implementing visa crackdown measures to limit work visas and ensure that foreign workers have the right skills and occupational licenses to conduct business. Additionally, with Brexit causing uncertainty, many South Africans have decided to look towards America for a Plan B.”

Joseph Barnett, a partner of the law firm who specializes in EB-5, is currently making his second trip to South Africa in the past six months.

“I really enjoy meeting with South Africans on my previous trip,” he says. “They are friendly, hospitable and hardworking. I’m sure this is the main reason most South Africans seem to do so well in the US.”

Why consider the EB-5 Visa

“The EB-5 Visa remains popular because there is no US employer sponsorship requirement, no education requirement, travel throughout the visa process is relatively simple, and because South Africans can choose to live wherever they desire once obtaining the green card,” the attorney adds.

“In short, the opportunity to live the American dream is open to anyone able to invest $500 000.”

South Africans should be aware that regulations first proposed in 2017 have now reached the final stage of the rulemaking process, review by the US Office of Management and Budget, before being finalized.  The time to act is now.

For more information on how you can begin your US EB-5 Immigrant Investment Visa process, visit Eb5greencard.co.za

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Company Posts

Your Skill Set Could Be Limiting You As A Business Manager

Without a cross-functional skill set, business managers will stick to what they know and neglect what lies beyond their scope.

Wits Plus

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Almost 80% of SMEs (Small and Medium Enterprises) in South Africa fail within the first three years. This statistic presents a staggering blow to the hopes of the South African economy, which is invested in the crucial role of SMEs in stimulating economic growth and providing relief from a shockingly high unemployment rate.

Entrepreneurs, those that venture forth and create new business opportunities, face extraordinary challenges and dooming statistics in South Africa.

Inside larger, more stable organisations, the management portfolio has expanded to incorporate a whole new skill set. Managers now need to be leaders, who develop their people and innovate, while at the same time stimulating innovative thinking and being informed and prepared enough to be agile and responsive to change.

Related: No Time For Ongoing Learning? Try Online

Intrapreneurs, those organisational managers that display visionary leadership and stimulate the creative thinking that unlocks new business potential, are in high demand and short supply.

What closes doors for entrepreneurs and intrapreneurs?

According to a recent study SMEs fail as a result of both external and internal factors. The South African economic and business landscape and the impact of globalisation make it challenging for any entrepreneur to succeed.

As managers of SMEs, entrepreneurs struggle to obtain the right talent to fuel business success. They also lack the knowledge, skills and experience to obtain business funding and manage resources and finances effectively. With no business insight, no money and no resources, even the most visionary entrepreneurs will encounter doors slamming in their faces.

Leaders in organisations are not faring much better. South African leaders are focused on developing their skill set to manage the organisation of the future. Old ways of managing have been disrupted with concepts like collaboration, agility, innovation and cross-functionality.

South African organisational managers face the same battle that the managers of SMEs face – there simply isn’t enough talent to drive business success. Without the skills to unlock potential in themselves or others, business managers are unable to open the doors to new business opportunities.

Skills for visionary leaders

From these challenges, it is clear that managing a small business or a business unit in a large organisation requires a new skill set that will create a well-rounded, informed and visionary business leader.

Related: What Authentic Leadership Really Means And How You Can Become An Authentic Business Leader

Tim Brown, leader of global design company IDEO, proposes the concept of a T-shaped person, who has developed deep technical expertise in their area. These experts in a given area often become managers of either their own business or a business unit because they are just so good at what they do.

However, this deep expertise is not enough; leaders of the future should have a broad skill set, symbolised by the horizontal line of the T. This broad skill set should include people skills, the ability to collaborate across business functions, a basic understanding of other business areas, an ongoing growth that spans across organisations or businesses.

Today’s business managers should be able to understand and leverage the broader business landscape, balancing their expertise with a wide swath of cross-functional business insights that will allow them to play comfortably with others and navigate the broader business landscape.

Without a cross-functional skill set, business managers will stick to what they know and neglect what lies beyond their scope. The resulting imbalance will see areas of the business wither away for lack of attention, fuelling the high failure rates of SMEs and the challenges that keep organisational managers awake at night.

The Wits Plus Business Management Essentials short course provides entrepreneurs and intrapreneurs with a broad view of the business landscape and aims to produce T-shaped business managers, with deep expertise in their own fields, coupled with broad, cross-functional business savvy.

Related: Rethinking Learning In The 21st Century

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