FUNDING YOUR FRANCHISE
Like most small businesses, new franchise units are rarely funded from cash reserves, and borrowing may be necessary.
It’s likely you’ll be borrowing money to buy your franchise.
As a significant and valued contributor to the Australian economy, franchising brings with it great opportunities for aspiring entrepreneurs and lenders. It is important to remember that franchising is really just a subset of small business and, like most small businesses, new franchise units are rarely funded from cash reserves.
The practical reality is that most franchisees will need to borrow to complete their acquisition. Accordingly, and like for most small businesses, access to finance can be a challenge.
However, many franchise systems enjoy a distinct advantage over independent small businesses in that they have a successful and proven business model.
Firstly, at the core of a franchise, is the requirement for uniformity in providing a quality service or product experience for customers. The same ingredients, same process, same presentation and same end product are all critical to the transaction at hand.
If uniformity is the product, then consistency is the business. The expectation of a quality, identical product or experience (every time) is the key to driving repeat business for not only that outlet, but indeed every unit of that brand across the network.
MEANINGFUL DATA
The other great opportunity for franchising is the ability to collect meaningful data that can provide insights to the individual franchisee, their franchisor and, importantly here, potential lenders. Why is that data so important? Quite simply, the data provides the ability to evidence or support predictability. Lenders are in the business of lending money – and getting it back. When they are provided with meaningful data, they can
be more comfortable with the transaction as it helps them interpret the risk profile. For example, key projections supported by “average” sales, margins, occupancy costs and wages can all enhance confidence around the level of cash a franchised outlet may generate to cover living expenses and loan obligations.
In this context, it is important not to confuse “average” with “mediocre”. Lenders do not like surprises, and fact-based data helps reduce that risk. Franchise brands that cannot, or do not, collect data on their networks find it hard to close the “information gap”, which is the biggest impediment to providing franchise finance.
For many years, the lending community has recognised franchise lending as an important part of its small-business lending portfolios. Lenders have created various approaches and accreditation programs to streamline the processing of individual transactions, and to track their group exposures.
While they have continued to add new brands to their panels, they have also been more active in removing brands where there have been few loans written or an unacceptable level of problem loans.
MORE CONSERVATIVE
As well as that, some recent adverse media reports have made lenders more conservative as they take their time to objectively establish the facts and confirm the health of the brands and small businesses they are supporting.
On a positive note, some new lenders have entered the market and lenders across the board are increasingly recognising the efforts of some brands to promote improved access to finance for their franchisees through an improved lender experience.
There has also been a tangible commitment from lenders to better understand and serve the many quality brands in the sector, with more than 50 individuals having undertaken the CFE-accredited RFLS (registered franchise lending specialist) program introduced last year. Lenders like to be associated with strong brands with good growth prospects and a good track record.
Apart from reviewing their own loan portfolios, experienced franchise lenders focus on several key areas to help them predict risk. Recruitment practices, approach to site selection, initial training and ongoing support are just a few areas they seek to better understand.
Unfortunately, many good franchise brands do not have formal accreditation arrangements because of the lower capital cost to enter their system. Fortunately, these brands can still create independent tools that can be used by all lenders to assess transactions on a case-by-case basis. It is important that both these lower capital outlay and younger brands do not give up and concentrate on controlling what they can
here are several positive signs lender watch out for:
RELATIONSHIP BUILDERS.
Brands that already have (or are building) good rapport with lenders. They ask lenders what more they can do to make it easier for their franchisees to take out loans. They offer plenty of information and relish being able to provide examples to prove how they support franchisees. Quality brands see the occasional problem as an opportunity to show lenders and potential franchisees how strong and effective their support is, knowing
that lenders recognise this as a key step in preventing business failure.
• MULTIPLE ACCREDITATIONS.
Lender accreditations are a good sign, but be careful not to confine your search to those brands that hold them, as plenty of good brands create lending opportunities through other mechanisms.
• COMMITMENT TO TRANSPARENCY.
Early and open conversations with prospective franchisees, membership of the Franchise Council of Australia and registration on the Australian Franchise Registry (reflecting the currency of key compliance documentation, the availability of lending tools and other measures of transparency) are all good indicators of a commitment to transparency.
Just as there are positive signs, there are also warning signals for lender relations. Prospective franchisees should tread carefully when franchise brands wave red flags in regard to lenders...
• EXCESSIVE AND HIGHLY EMOTIVE OR PUBLIC CRITICISM OF LENDERS.
The foundation of a long and enduring lending association is the relationship. Lenders deal with, and warm to, brands they believe are trying to work with them. Getting them offside generally only sets back the long-term aim and benefits of improved access to finance.
• A FALLING NUMBER OF “ACCREDITATIONS”.
The withdrawal of an accreditation is not always a warning sign as sometimes there are simply not enough loans to support the program, or there has been a cut in the lender’s staff numbers. However, it can be a direct reaction to problem loans and franchisors not doing enough to support their franchisees.
• OVER-RELIANCE ON BROKERS.
There are some good finance brokers in the franchise finance space who play an important role in lending. However, they are of limited value when a franchise brand is not attractive to a lender in its own right. Quality franchise brands find a way to improve their relationships with lenders and reduce their reliance on brokers.
Australia’s major banks are still the most active in the franchise lending space with the ANZ, CBA, NAB and Westpac all maintaining dedicated franchise bankers and franchise-lending policies, though there are significant differences in their models and activity levels.
Franchise-lending activity and appetite is also apparent in regional lenders and specialised lenders such as Bank of Queensland, Cashflow It, Silver Chef and, more recently, Judo Capital.
MORE CONSERVATIVE
Franchisees that have benefited from the expertise and ongoing relationships with lenders should be a prospective franchisee’s first port of call in trying to identify and connect with the best franchise lenders. Registered franchise lending specialists are listed online www.thefranchiseregistry.com.au.
No matter which lender you turn to, they will be looking for well-organised applicants and solid future business owners. A fully completed application form with copies of supporting documentation and a simple business plan will go a long way to creating a good first impression. Prepare yourself well with a good understanding of what information is needed, how much you need to borrow, how you will pay it back and what your “fall-back” position will be if your business expectations are not met.
While not always straightforward, well-researched franchisees and ‘“lender friendly” brands continue to find ways to access and simplify the funding of new franchise units.
Darryn McAuliffe is CEO of FRANData Australia and has more than 30 years’ experience in the banking and finance sector. He is a CPA, CFE and experienced former bank executive across business banking, risk management and franchise industry specialisation. FranData has been supplying independent information to support key franchise decisions for more than 25 years and runs the Australian Franchise Registry.
Some recent adverse media reports have made lenders more conservative as they take their time to objectively establish the facts and confirm the
health of the brands and small businesses they are supporting.