The bank will never finance you 100% for a franchise business, depending on the business, the bank will most likely require you to contribute a minimum of 50% own contribution (cash-unencumbered funds) toward the purchase or set up of the business and the bank will assess funding the balance.
It is important to note that own contribution and collateral are 2 different items:
- Own contribution is the cash (unencumbered funds) you invest in the business
- Collateral is the asset which you use as security for any financing (e.g.: cash ceded in an investment account, cession of shares, cession of investment which has a surrender value, bond over property having assets, general notarial bond over assets of the business etc.)
The difference between own contribution and collateral is probably ably best illustrated by way of example:
If a franchise business costs R1 200 000 to purchase or setup:
- You would be required to invest a minimum of R600 000 cash towards this purchase cost – this is your own contribution
- If the bank assesses funding the balance of R600 000 in the form of a business loan, they will require some sort of asset as security for the R600 000 loan – so you may register a second covering bond over your property in order to provide security for the R600,000 business loan – this is collateral