Franchise funding, loan applications and franchisor compliance

franchise-funding

When it comes to franchise funding it is crucial that Franchisors have answered all the required policy requirements to prove that the Franchisor will be compliant to enable the Franchisee to apply for funding seamlessly. The franchisors reputation with the institutions will then be viewed favourably to expedite loan applications.

Consider these Facts:

  • The National Development Plan was created to eradicate poverty and reduce inequality.
  • The SME sector is 52% of the GDP, which is approximately 1 trillion Rand of GDP.
  • 90% of jobs will be created by the SME sector by 2030.
  • This is where the government’s focus began with training of new business owners.

According to FASA member and franchise consultant Robin van Rensburg of Franchise in a Box, banks in general monly finance 26% of SMMEs and mostly in the maturing stages of development. “This is a real problem for start-up franchises or even medium start-ups as financiers normally prefer funding maturing companies. Location and geographical areas/locations is also a big factor when it comes to funding. For example, Gauteng would get finance faster than someone in the Northern Cape or from Mpumalanga.

The National Credit Act was brought in 2005 to promote a fair transparent, competitive, sustainable, responsible, efficient, effective credit markets and industry. The purpose of this Act is basically two pronged which is to protect the consumer. “But most people feel that it’s regulating the credit industry which I think is a good thing,” says Van Rensburg. “That’s not a negative. The problem with banking and every other area of finance is that you can get over indebted, which is a real issue. There’s a classic case in 2008, where Judge Erasmus ruled on an indebtedness of a client, which they then sent back to the bank and the bank had to reorganize the loan. So that’s quite a good thing. Recently Capitec was fined for allowing one of their clients to become over indebted.”

If we review the banking system, it’s quite important to understand that the international banking system interacts and interelates, and they have processes or mechanisms in place to have credit compliance with international and local systems. This is a huge problem because they become very risk averse and it’s very difficult to get money from your bank. If we look at the USA and their housing loan collapse, which had an international ripple effect on the world economies. Mr. Reddy, Ko-lay Franchisor, which was an influential businessman from Durban, worked with a lot of banking leaders to enable funding for the smaller previously disadvantage businesses. He always said, “To borrow One Rand you have to have Two Rand in your pocket, which does not make any sense.”

FASA, over the years, has played an exceptional role in influencing legislation and the banking sector. Through the years they’ve ensured all the documentation for franchises is based on world standardised ethical franchising. Compliance of all the documents, for example, the Disclosure Document and Franchise Agreements are scrutinised and is a huge responsibility for FASA to ensure compliance to the CPA Act. It is a pity that not everybody is FASA registered because this would promote ethical franchising for all franchisors.

Most major banks require franchisors to be FASA registered and have at least five franchisees. This presents a stumbling block for start-up franchisors. Once again, it’s the mature franchise owners that readily get funding for their new franchisees. Usually, start-ups apply for FASA preliminary membership and after they have five franchises they convert to full membership. The banks often require full membership with at least five franchisees that has operated for more than a year.

Factors that play a huge role with Franchised Finance Applications include:

It is essential to implement systems evaluating new franchisee applications.

New franchisors tend to be so desperate to sell, they forget to have systems in place evaluating new franchisee applicants. The basics are to do a credit report on the prospective franchisee as well as a psychological evaluation to be able to have a perfect fit for your organisation. It is highly advised to do a criminal clearance report.

Financial institutions insist on proof of the correct Site Selection.

A structured site selection process is essential for the franchisee to be successful. The franchisee usually buys a franchise when they have a site already available. The Franchisor then evaluate the site and approve it based on the site criteria for the specific brand. Remember a successful site is solely based on the right location, location, location as always with any business. You are required to prove that a site is going to be successful. This entails a study of the site which includes market reach, footprint, parking, etc. There are companies that will do this for a fee

Franchisee Own Contribution

The Franchisee is required to have at least 50% of total investment in unencumbered and secured deposit to buy a Franchise. This means that this deposit cannot be a property or assets, it must be unencumbered.

Owner Run Businesses

Funders prefer owner-run businesses. A course on business plan training should be part of every franchisor’s training program. This will play a big role in educating the new franchisee to run the business effectively and prepare them for all eventualities. The business plan is also a tool for the funders to see if a franchisee is ready to run the franchise. This will also improve the success rate if the franchisee is trained to run the business. Prospective franchisees can work off a template but must make quite sure that they personalize their business plan so that the funders get the assurance that the franchisee will be able to run the business and be a success.

Pre-registering as a Franchisor

Franchisors can pre-register with their mainstream institutions like Absa, Nedbank, Standard Bank and FNB.  By registering and once they have a franchisee, they can supply them with an application pack. The banks will then just vet the franchisee and site, to see if they will be able to manage the loan repayment.

List of requirements:

  • Business plan.
  • FASA certificate.
  • Financial projections of the franchisor – 5 year plan.
  • Projected financials and predictive financials, low, medium and high franchisee.
  • Franchise documents and franchise agreements.
  • Operations and procedures manual Index.
  • Franchisor management structure – to show that you can manage your franchisees.
  • Franchisee roll-out plan.
  • Marketing policy – the plan to market the Franchisees. 1 year is sufficient.
  • Training program – initial and ongoing training.
  • Policies on franchisee retention and failure management.
  • Site selection policy.
  • Franchisee recruitment policy.
  • How to measure KPI’s (Key Performance Indicators) in relation to finance, quality, delivery, staff.
  • Inspections and how will to manage the support of the franchisee.

Conclusion

“It is very difficult getting franchisee funding and it takes a long time, concludes Robin van Rensburg. Franchisors usually allow 90 days for these applications and should have provisions to terminate the agreement if not successful. If all the above provisions are supplied to a finance institution it will speed up the applications dramatically.”  

Robin van Rensburg
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