An Introduction to Franchise Finance: All You Need to Know
In South Africa alone, there are over 600 franchised brands and over 31 000 franchised outlets. The sector is well-developed and offers you exciting business opportunities.
A key driver of the sector’s growth is the relative ease of financing a new franchise in comparison to a stand-alone or start-up business. The ongoing support, strong brands, and proven business systems associated with franchising make financing a franchise less risky for the banks. Most major banks have a dedicated franchising team with a good understanding of the sector to support you.
This doesn’t mean that you can simply ask your bank for money and hope for the best! Your bank will still pose the tough questions, and you’ll also need to invest your own savings into the business.
Prospective franchisees may get discouraged because they don’t understand the process, costs and timing involved in financing this new venture. To help you avoid the same fate, this section gives you a breakdown of everything you need to know about financing a franchise.
What type of finance are you looking for?
While bank finance is the most common form of franchise funding, there are also a number of other avenues to explore. We provide these as well as the advantages and disadvantages of each. We also provide some guidance on approaching and working with a bank.
How much money will you be investing?
The banker will want to know how much of your money you’ll be putting into the business. The amount of money you contribute to the business illustrates to the bank your commitment and the risk you are willing to take to make the business a success. Remember that banks will require you to provide at least fifty percent of the initial investment and they will then assess funding the balance of the setup costs.
What fees will you need to pay the franchisor?
We touch on franchise fees and explain the rationale for the initial and ongoing fees you can expect to pay as a franchise.
How much money do you need?
Here you need to strike a balance between asking for too much and burdening yourself with unnecessary interest payments and too little which means you could hit cash flow troubles soon. Remember that you will also need working capital (link to Working capital requirements) while the business is building up. Contrary to popular belief, there are also a number of lower-cost franchises on the market.
How do you plan to spend the money?
Part of your application will include a business plan. This details where the funds will be spent together with the franchise’s strategic and financial goals and how the money will be repaid. Your franchisor should be able to support you with compiling this business plan to meet the bank’s requirements.
How much can you expect to make?
Returns are an important part of any investment decision. We also tackle financial expectations and get you thinking on how best to optimise the rewards from your franchise.
Good luck. Remember that the best time to start your application is now.