By James Scurr
It’s an obvious statement, isn’t it? Yet many franchisors don’t understand how helping their franchisees to access the right finance can help them to grow their brands. I cringe when I hear a franchisor say, “I don’t really care where they get their money from.” You should! The more successful your franchisees are, the better performing your network will be and, ultimately, the more your brand will grow and be recognised.
Accessing finance has long been touted as one of the biggest obstacles in franchising. Unless your franchisees have considerable equity in property and plenty of cash to contribute, most will need finance to assist them in opening a franchise business.
Whilst banks play an important role in financing the Australian franchise sector, they aren’t always the whole picture.
There are a number of reasons why:
Size of the deal – while some franchises can carry hefty price tags, many require borrowed funds of less than $200,000. Given the lower margins and higher cost of doing business for banks, deals under this size don’t really excite They also have to do the same amount of work and go through the same process regardless of the loan size, so they want to see the bigger deals.
Greenfield sites – unless within a formal accreditation program, banks typically won’t fund greenfield Mention the word “start-up” and the odds are quickly stacked against you.
Exposure limits – the banks have internal guidelines on total exposure, not only to franchise groups, but also industry sectors. Banks may have caps both on the number of units financed, the number of brands in a particular industry and total capital exposure to each group. These are continually being re-weighted and may impact whether funds are available for your franchise system.
Security – despite claims that banks lend against business cashflows, in reality for most franchises they rarely lend without additional supporting security, even when your franchise is on their ‘accredited’ If your franchisees don’t have the asset backing in the ratio required by the bank it could be hard work.
While there are exceptions to the above, I am sure every franchisor can recall specific scenarios of excellent prospective (or existing) franchisees that were declined by a bank. You need to have multiple options – you need to build a finance toolkit for your franchise.
The whole idea around a finance toolkit is to give your franchise network a range of options. All franchise partners are going to have differing financial profiles, so having options to meet those different profiles is essential. For a franchisor trying to grow a network, there is nothing worse than finding the right franchisee that doesn’t meet a bank’s credit criteria and losing the prospect.
So what should your finance toolkit include?
- A listing on The Australian Franchise Registry™
- The Finance Ready tick from FRANdata
- Accreditation with one or two banks and a non-bank lender
- Consider other strategies you can adopt to assist franchisees
FRANdata introduced the concept of ‘Finance Ready’ franchises in October 2017. This program assesses various criteria and recognises brands that provide good information and enjoy good relationships with franchise lenders. Being Finance Ready will put you on the front foot with lenders and should also result in an improved lender experience given the information this service can assist lenders with.
Franchise Accreditation offered by lenders recognises the strength of the brand. Lenders offer a pre-approved percentage of the purchase price or dollar figure for the franchise business and this can be one of the most hassle-free ways your franchise partners can obtain funding. Most of the major banks offer Franchise Accreditation and a small number of non-bank lenders, like Cashflow It, offer this accreditation as well.
The processes involved in becoming an Accredited Franchise will vary from lender to lender. Bank accreditation is generally available to networks that have more than 40 or 50 units. It can be quite a comprehensive and lengthy review process and is normally subject to regular review. Accreditations can also be withdrawn if the quality of the loan portfolio deteriorates.
The amount you can access through bank accreditation may still not be sufficient for franchise partners to complete a purchase. While loan to value ratios vary, the average bank accreditation will allow lending of between 50% to 60% of the purchase price of a franchise. Given many franchises can reach values in the hundreds of thousands of dollars, this can mean significant savings are required, often still resulting in a shortfall. Bank accreditation is also not a guaranteed approval.
There may still be specific criteria your franchise partners have to meet, like equity in property or minimum cash amounts contributed to the purchase.
Accreditation with non-bank lenders is often a much quicker process, especially with lenders that have a good understanding of franchising and specialise in the franchise sector. Non-bank lenders are generally more flexible than traditional banks, as well. While the cost of capital can be slightly higher than the banks, there are many benefits to a non- bank lender’s product offering:
- The non-bank lender is themselves funded by banks and other financial
- Fast approvals – generally 24 to 48
- May not require asset
- May be willing to fund greenfield sites and assets generally avoided by the
- More flexible contract terms like the ability to return and upgrade
This means generally non-bank lenders are willing to take on more risk than banks, and non-bank lenders will be much more willing to consider those smaller value transactions that the banks typically shy away from.
When considering non-bank lenders that specialise in the franchise sector it makes sense that they would be members of the Franchise Council of Australia, and their staff, Registered Franchise Lending Specialists.
On the topic of non-bank lenders, it is probably worth mentioning the recent proliferation of ‘Fintechs’ (software and technology-driven lenders). While these companies generally have funding available for franchises, this seems to fit more into their generic small business offering than a customised offering for growing franchise systems. If you are an existing franchise you may be able to access small value,
short term cashflow lending transactions, but these can come at a very high borrowing cost. And in the case of hospitality or retail franchises where the cash cycle is instant, it isn’t always clear why a healthy franchise business would need to access these types of short term lending solutions.
As a non-bank lender that specialises only in the franchise sector, I speak with franchisors daily. In some of these conversations, I hear how franchisors are developing internal strategies to fund and support new franchisees into business. Some of these include:
- Employee to franchisee programs – look at how you can develop and support employees within your company-owned and franchise-owned stores to become Some of the best franchisees come from within the existing network.
- Deferred payment of the franchise fee – the upfront franchise fee can be a considerable cost in the set up of a new Consider offering a franchisee to pay this back over a short period of time once the business is trading.
- Providing your personal guarantee – if you have a great prospective franchisee that isn’t going to qualify for finance without the lender having some additional comfort, this may be worth
- Provide in-house loans to franchisees – if you are in the fortunate position to have good cash reserves then providing loans to your franchisees may be an option. Consider the risks and ensure the funds wouldn’t be better utilised adding additional
Great franchisees are difficult to find, and you should never have to let an ideal prospective franchisee pass you by because of finance. Building your finance toolkit will provide options for you and your franchise partners.