One of the great benefits of franchising is that banks are more likely to fund a franchise than a start-up. The major banks have franchise divisions that focus on tailored solutions for the financing of franchises.
While it’s possible to get funding for a franchise, conventional banks and franchisors require franchisees to contribute 50% of the investment from their own resources, primarily in the form of cash. For example, a franchise that costs R1 million will need an investment of at least R500 000 from the franchisee. The reasons for this requirement include the following:
- It prevents “over-gearing” of the business by ensuring the franchisee can pay back the loan from the business proceeds. If the loan amount is too high, the franchisee may have difficulty repaying the loan out of the cash generated by the business, which could lead to business failure.
- It is a demonstration of the franchisee’s commitment to the business.
- The total investment is not just paid to the franchisor. Other expenses are payable to third parties, such as a rental deposit to the landlord. Having cash available for these expenses can expedite the process of launching the franchise.
Some banks and government institutions offer financing with a lesser own contribution to promote industry transformation, and the franchisor should be able to advise on this.
Financial institutions all have their requirements and application forms, but in general, the following information will be required to process a loan application:
- Approval letter from the franchisor stating that the individual or company is approved as a franchisee, pending the granting of a loan
- An offer to lease from the landlord or proof of the proposed premises
- Financial cash flow projections for at least three years
- A business plan detailing information on the business, the site, competitors in the area, the background of the franchisee, proposed team structure, launch plans, and other pertinent information.
- Proof of own contribution, whether this is cash in the bank or money due
- Proof of security cover for the loan
The security cover required for the loan will vary by the franchise and the bank’s requirements, but in many instances, an individual will have to provide security for up to 100% of the loan amount. Security can take the form of a property with equity in the bond or policies with a surrender value.
Getting funding for a franchise can be expedited by being aware of these requirements. Franchisors often have good relationships with the banks and can refer potential franchisees to the correct department to start the process.