Franchising is about…financing your business
“What often causes businesses to fail is not their profitability but their cash flow.”
Financing a business goes beyond just having some capital to start – you need to factor in everything from start-up capital to ongoing financing, from hidden costs to expansion funds. If there is one lesson that has been learnt, it’s that cash flow and the strict management of finances is at the core of every successful business.
The Business Plan Is Your Lifeline
Whether you are a prospective franchisee or an established franchise owner, your business plan must serve as the road-map to succeeding in your business. For the new franchisee it is an indispensable tool to getting into business – it forms the foundation to what, where and how you are going to become an entrepreneur. For the established franchisee that has been up against trying times, now is the time to take out that business plan, tweak and update facts and figures and tailor it for your business going forward. The Business Plan becomes your guide-book to planning and strategizing for long-term success and provides the motivation to you and others to support the business. This includes bankers, financiers, suppliers, customers and partners.
Meeting The Bank’s Requirements
In view of the years of recession, coupled with the impact of Covid-19, the approach by banks is one of extreme caution. They will look at both the person they are lending to and the business that they are embarking on. Fortunately, most of the major banks have dedicated franchise desks and they are familiar with many of the leading franchise brands so prospective franchisees are often considered more favourably than a conventional start up business. Most banks consider the following when assessing a prospective lender:
- The person they are lending to
They will do a thorough investigation into your background, your financial health and your track record. - The purpose for the loan
Banks need to make sure that you are legitimately setting out to start a business and are committed to seeing the project through. This is where the business plan comes in as it will give the bank the full picture of what you intend achieving with the loan. - The amount of the loan
The bank will look to see that the cash flow forecast in your business plan shows that you can repay the loan. They will also look for any contingency plans in the event of any setbacks. - The repayment plan
The feasibility of the business plan and your cash flow forecast will show whether you are able to afford the repayments. The bank will consider where the repayment is coming from, look at future trading forecasts after allowing for all your other financial commitments and will consider if you have any alternative sources of repayment if you have a problem. - Security
Banks want to know, above all else that their loan will be repaid. Whilst they look at the cash that the business generates as the prime source of repayment, they will also assess the risk and look at your alternative sources of repayment and what types of security you can provide. - Loan Products
The banks have a wide range of loan products and in addition have subsidiaries or partners who can assist with asset financing (such as leasing and hire purchase). Some banks also offer factoring as a service, in which they will advance you a proportion of the money owed to you by your customers. Overdraft facilities provide a flexible borrowing arrangement up to an agreed maximum which can help pay for your working capital needs. The interest rate charged on an overdraft is normally higher than a term loan, but in monetary terms it is often cheaper because you only pay interest on the outstanding balance. There are also special equity funds set up by the banks and funders to invest in small black-owned businesses that do not have enough collateral for a term loan.
To protect, lobby, promote and develop ethical franchising across all sectors in South Africa with specific focus on transformation.
