What Franchise Finance Options are Available to New Business Franchisees?
Accessing funding for start-up businesses such as a franchise is becoming increasingly difficult, with traditional lenders becoming more selective. As a result of franchises’ higher success rate, compared to other types of businesses, prospective franchisees are more likely to obtain financing. The rejection rate of financing for a franchise is definitely lower than independent businesses.
Despite numerous franchise financing options available – from commercial banks to government funding agencies, equity investors or venture capitalists – businesses are currently struggling to obtain finance, for a range of reasons, including the current global credit crunch.
Bank loans are the traditional way of raising money to start-up and build companies.
They have many types of products available to suit a variety of needs, but you will almost always be required to provide some form of collateral in case you cannot repay the loan. Life assurance policies and homes are the most common forms of security that banks require.
The single most important issue in securing financing from a bank is your credit record. When applying for a Business loan, you will need the following items to name a few:
- A completed ‘loan package’
- A personal financial statement
- Any other relevant documentation
The downside of securing a business loan from commercial banks is that banks are notoriously inflexibility, and there is a lengthy application process and poor approval rate.
Banks favour businesses with brand names and long track records of consistent cash flow; therefore your choice of franchise concept can help or hurt you. Franchise systems with fewer outlets are less attractive, mainly because the concept has not yet been adequately proven.
Other franchise financing sources
Some franchisors offer financing to prospective franchisees, or have established agreements with lenders. Acquiring the franchisor’s approval for your application could be a key advantage in securing financing.
A mentorship programme or Black Economic Empowerment initiative, involves a franchisee purchasing a small share in a franchise and managing the business under the mentorship of the franchisor or another experienced member of the management.
The candidate’s accrued profits will be used to buy shares in the franchise until he becomes the sole owner of the business.
Government programmes and incentives:
There is an extensive list of grants, development funds and incentives. Grants are awarded according to specific criteria. It is crucial to do extensive research and check that the criteria are suited to your business aspirations and vision.
Advance cash option:
This involves advancing a lump sum of the business’ future sales. This means the business effectively funds its own growth. The franchisee returns the money by paying an agreed amount from their card transactions.
Investors and venture capitalists:
The advantage of an equity investor is that the funding does not have to be paid back. Shareholder dividends are usually paid once the cash flow allows it.
After carefully reviewing all avenues available to you, as a franchisee, you must devise the appropriate funding strategy for your needs, even if it calls for getting creative with your financing options.