Financing your franchise
FOOD, R FUEL FR ARE APP RETAIL AND RANCHISES PEALING TO
Unless you have enough money to pay in cash, you will need to find a way to f inance your franchise. This is not an easy task, especially in today’s trading environment, but South African lenders recognise the potential of franchising, and as these ventures ultimately carry less risk (with their proven business models), the franchisee has the upper hand when it comes to loan approvals. However, the bank isn’t going to dish out finance if the prospective franchisee hasn’t done some serious homework!
Mark Rose, head of New Business Development for Nedbank Business Banking, comments: “When we deal with franchisees that already own existing operations, we take into account track record and past performance of the franchisee as
key criteria to the lending.” This is to avoid any form of reckless lending. Banks will need to look at your track record to decipher possible strengths and weaknesses of the operation. “Entrepreneurs must be financially fit,” says Simone Cooper, head of franchising and Enterprise Development at Standard Bank. She says that before approaching t he bank, the prospective franchisee should first be approved by the franchisor. “Next, he or she will need to gather all the necessary information required by the bank.” Examples of this would be personal finance information (statement of assets and liabilities), comprehensive financials for the business including projections and cash f lows (if the franchise is an existing concern) and a business plan.
I F YOU’RE A NEWCOMER TO THE WORLD OF BUSINESS AND FINANCE,
Nedbank tends to assess ‘new to industry’ franchisee applications with a more cautious approach as the applicants still need to prove themselves in their business. But in this case, support interventions, or business mentorship to support the business owner, are considered. Although direct industry experience is not a prerequisite, general business acumen is essential.
FRANCHISEES NEED TO DEMONSTRATE
that they have fully investigated the sector and brand they wish to sign up to. Rose says: “In this case, the following questions will be asked: Have you obtained testimonials from existing franchisees within the brand? Have you sought legal opinion on the agreements to be signed? And you are able to invest your own capital to ensure future sustainability of the business?” The required minimum unencumbered cash contribution ranges from 30% to 60%, depending on the type of concept being considered.
In terms of assessing financial feasibility of a prospective franchise operation, Rose says that ‘ benchmarking’ of certain f inancial ratios is considered with emphasis being placed on individual brand data, supported by additional industry analysis/input. Ultimately, the business’ projections (at least two years) need to demonstrate profitability and adequate affordability with regards to ‘debt servicing’.
Both Standard Bank and Nedbank offer competitive asset f inancing solutions that are followed by active participation from the lenders as far as repayment structuring is concerned. Both banks also offer payment and collection capabilities, such as point of sales devices as well as business current account services with overdraft facilities. Although banks will not take an active role in management, they do offer market intelligence services such as demographic and industry analysis. Should franchisees find themselves in financial difficulty, both banks offer informal business rescue services to assist with turning the business around.
WHICH SECTORS ARE APPEALING TO LENDERS?
Standard Bank focuses on franchises that are in either the retail, fast food, fuel station, automotive or telecommunications sectors. Nedbank focuses on what they believe to be the three most prominent franchise sectors – food, retail and fuel. “These sectors have demonstrated the most growth and seemingly best ROI,” says Rose. Lenders are generally most comfortable directing finance toward sectors with which they have had previous experience. This allows them to take comfort in identifying early trends and risks that are prevalent to each sector.