How Different Types of Financing Can Be Used to Boost Your Franchise
Despite the challenging economic environment and the competition that franchisees in South Africa face, there is a range of finance options that franchisees can leverage to boost their business, even when the odds are stacked against them. As fintech advances in South Africa and as the alternative finance sector simultaneously takes off, the business finance space has become somewhat complex and confusing for many. FundingHub exists to break down these complexities for small and medium-sized business owners and to allow businesses to compare different lenders and the various financial products they offer to secure the best deal for their business’ needs at that point in time. Many of the business finance products that will be discussed in the rest of this article are often pooled together and referred to as small business funding, which implies that most of these funding options do not follow the traditional banking model where collateral (in the form of property) is required to secure funding.
Alternative Finance vs Traditional Bank Finance
A concern that understandably arises for business owners when it comes to alternative finance is that it is often more expensive than traditional bank finance. While this is sometimes the case, and that frequency is dropping rapidly as technology becomes better at predicting business and credit risk, the reason is that these loans are much riskier for lenders as they do not have the rigid collateral and bureaucracy that traditional banks do. Nonetheless, business owners leap at alternative finance products because they are:
- so much faster,
- more efficient,
- and have a fraction of the red tape associated with traditional bank loans.
Consider Your Current Business Success
A top tip when considering applying for business finance for your franchise is to consider the current success of your business.
- Do you have adequate cash flow?
- Are you turning a profit?
If your answer is yes to both of these questions then your franchise might not actually need a business loan, and there may be another avenue you should explore to grow your business. Debt can be a difficult thing to manage so if you can avoid it, then it is worth thinking twice about.
Potential Reasons for Requiring Finance in Your Business
Business Finance for Growth Purposes
One of the major reasons why your franchise might need business finance is for growth purposes. This is when you can confidently say that cash is the only thing preventing you from taking your franchise business to the next level.
Growth capital can be used to bridge the cash gap to help you boost your business. FundingHub has a number of lenders on their platforms who can provide you with the growth capital you need for your franchise.
Business Finance for Working Capital
Another reason why your franchise might need business finance is for working capital. This is the case where you realise that your business is short on cash. Here are some examples of working capital business finance solutions that you could leverage to boost your franchise::
- Purchase order funding – This is where you can use your purchase order documents from reputable companies and use them as ‘collateral’ to draw funding from a bank. This is especially pertinent if your franchise has any large commercial clients.
- Invoice factoring or discounting – This is where your invoices owed to your franchise by debtors form the collateral in the transaction with the financier. In this case, the funding amount that you can obtain is based almost entirely on the value of your debtor’s book.
- Revolving credit – Think of a revolving credit facility as a credit card for your business, allowing the franchise to draw down against a pre-determined limit as and when needed.
- Unsecured term loan – This is when business funding is issued to your franchise based on the creditworthiness of the business. Cash flow and business profitability are very important aspects to consider when applying for an unsecured loan for your franchise.
- Merchant cash advance – This is a type of business finance that franchisees who are in the retail space should consider when working capital is needed. It allows the business to obtain funding advanced on the turnover of the franchise, usually the card machine turnover specifically.
Specific Needs for Business Finance
There may be times when your franchise has specific needs for business finance. There are specific financial products for these specific needs that your franchise may have, and the beauty of these products is that they can be tailored to suit the specific needs of your business, meaning you obtain exactly what you need and pay interest for the tailored situation as opposed to a blanket interest charge.
Examples of these specific need include:
- Purchase or lease equipment:
- The most common equipment finance process is called a lease-to-own contract, which is when the financier maintains ownership rights to the equipment (or asset) you are financing, until the point in time where your final installment has been paid, then your franchise business takes ownership of the equipment.
- The reason that this tends to be a popular option for many business owners is that the fees tend to be lower as there is less risk involved for the lender.
- Purchase or upgrade your business property:
- In the case of property finance for the purchase or upgrade of your business property or premises, the financier will usually use the property in question as collateral for the finance that they provide to you.
- This is usually the cheapest type of small business finance because the collateral (property) is very solid.
To wrap up all the different options that are available to franchise owners who are seeking funding for their businesses, it is good to consider the advantages and disadvantages associated with receiving business funding.
- accelerated business growth,
- efficient to access,
- fair interest rates are changed,
- and the business is able to purchase assets or equipment that are required.
Some downsides associated with securing business funding for your franchise may be that:
- you may not get approved for the funding you applied for,
- you may have to offer up some assets as collateral for the funding,
- and even if you get approved for business funding, you may not always get the ideal amount of funding that you initially applied for.