8 Ways To Fund Your Franchise Purchase
“How will you finance your franchise?” This is a question that you will be asked when you are applying to purchase a franchise.
Regardless of the total investment requirement, you will need to contribute 50% of the capital In cash (out of your own pocket). The balance can be financed through various means as discussed below. The own contribution comes with good reason, 50% own contribution vs the loan of 50% requirement is necessary because generally, franchised businesses cannot afford to repay a 100% loan for the full franchise investment as the business could be over-indebted and fail.
Here are funding options you can consider for a franchise:
People who are serious about purchasing a franchise should be committed to saving personal funds/wealth to work towards the goal of having sufficient funds to purchase a franchise with the necessary 50% own contribution. This might mean adjusting your current lifestyle to set money aside to create future opportunities with higher ROI.
This is the most common and traditional route for funding a franchise opportunity. A bank loan offers the franchisee a lump sum of cash upfront, which then accumulates interest and is repaid over a set period of time through monthly instalments. All the major commercial banks have franchise funding divisions that could assist you. Most banks adhere to their own contribution requirements as set by the franchisor. A prospective franchisee will need to go through an application and approval process to secure such funds. This is generally supported by a business plan with the financial forecast, approval letters from the franchisor, proof of surety and own contributions, creditworthiness assessments, financial history review, etc.
Alternative Lenders and Funding Institutions
Alternative lenders or institutions might have different requirements and turnaround times compared to those of commercial banks. They offer a variety of loan options, credit, term loans or even grants. This may include:
- Government institutions,
- Small business foundations or
- Private lending companies
In the current economy, retrenchment is a word we hear more than we’ve heard before. So many individuals need to be looking for alternative employment solutions or income streams. Generally, if the person was employed in a formal working environment they would have received a retrenchment package that can be invested in securing a viable franchise opportunity.
Soft Loan Through Family or Friends
Believe it or not, If you are in need of additional funds, family and friends might be in the position to assist you with a soft loan that is unsecured, interest-free and open-ended (meaning no fixed repayment terms and dates set). It is important to keep in mind if the business opportunity fails for whatever reason, your family and friends are at risk of not receiving their loan back. We would recommend a loan arrangement, even if informal, documented and signed by all parties involved and include all the terms pertaining to the loan.
Taking on a Business Partner
Some franchise opportunities would allow a franchisee to have a business financial partner i.e. the person who funds the operations and shares in the benefits but will not necessarily be involved in the daily operations of the business. This is also referred to as a joint venture arrangement and they can be referred to as a silent partner.
There might be an opportunity to discuss funding with the franchisor. Some franchise models offer tailored financing solutions to their franchisees, either through joint venture partnerships or assisting with financing as enterprise development, BEE, or for awarding outstanding staff with a franchise opportunity.
Crowdfunding and Stokvel
- A stokvel is generally known in South Africa as a saving scheme within a group or community where each member contributes a predetermined amount to the fund on a regular basis (normally monthly), to achieve a certain saving goal or purpose.
- Crowdfunding is usually where one reaches out to the public or a large number of people who can contribute variable small amounts of funds/capital to achieve the funding goal, this is mainly done through the internet.
If franchise financing is not available in any of the traditional or proposed alternative formats it might require the potential franchisee to source funds in a creative or new way e.g. financing a franchise through crowdfunding and or stokvel solutions. According to Wikipedia: Stokvels are invitation-only clubs of twelve or more people serving as rotating credit unions or saving schemes in South Africa where members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis.
Related Article: 3 Tips To Increase Your Chances Of Getting Franchise Funding