South Africa’s economy is under significant pressure and, for a number of reasons, there is little promise that this will change in the near future. In May this year, the International Monetary Fund (IMF) predicted only 1% growth in 2017, up 0.2% from their previous prediction of 0.8%. While it may be moving in the right direction, it falls short of being impressive by anyone’s standard.
Despite the economic challenges that businesses face, franchising is one sector that has consistently shown its resilience by performing well.
We spoke to Dumisani Bengu, head of Franchising at Absa, about the advantages of franchising and the financial options available to potential franchisees.
“As a business model, franchising is very resilient because you are buying an established brand that already has a committed following.” He explains. “South Africans are very brand conscious, they like to know it is a stable brand and that they can rely on the quality.”
And so, it seems, do banking institutions. But it isn’t the only factor considered when granting a loan.
“There a many reasons why a franchise model is appealing to a bank,” says Bengu. “Knowing that the applicant will have a certain number of customers who believe in the brand is just one aspect. Established brands also have tried-and-tested processes in the market, they have a mature and honed business model with track records and solid business projections. They also offer solid support in the form of training and guidance from experienced people who will guide new franchisees through all the pitfalls. All of this means less risk.”
Because of the resilience of established franchises, banks and financial institutions take a positive view of such companies. Existing relationships with certain franchises affords applicants preferential status when applying for finance.
What factors do banks look for when deciding to approve a loan?
“Banks are in the business of selling money,” explains Bengu. “They always have the will to lend money to fund your operations, but they need to be satisfied that their investment is secure.”
According to Bengu, the process starts with the bank assessing your level of risk, exploring questions such as:
- Do you present a creditable prospect to the bank?
- What are your ethical standards in terms of honouring your obligations?
- What kind of credit record do you have?
- If you are unwilling or unable to honour your obligations, what collateral do you have to secure the loan?
Your worthiness as an applicant, however, isn’t just about your credit rating or balance sheet. Personality is key to the success or failure of any business and, therefore, key to ascertaining whether you will receive your loan. Experience in business or as an entrepreneur helps, Bengu points out, but there are always individuals who show the signs that they have the right personality. Bengu encourages people to take a long, hard look at themselves to ascertain if they meet the criteria.
“Getting into any business is always an exciting experience, so people are always more likely to rush in without thinking everything through,” he says. “People need to assess themselves honestly and thoroughly to determine if they are happy to spend an inordinate amount of time running that business. If they aren’t passionate, their business will fail.”
Family support is also essential. Potential franchisees need to understand the pressures of the business weighed up against the family demands.
Basically, you need to know yourself inside and out, says Bengu, but also know the franchise. What is its track record? Are its ethics aligned with yours? What kind of training and support does it offer? Do your research, speak to people who have been there to get first-hand experience. One of the biggest mistakes someone can make is not fully investigating the business or yourself.
Does this mean that only well-established franchises with big names will be considered? “Absolutely not. But any potential business still needs to show that it is a business worth investing in. There should be some kind of track record (three to five years) and proof that they have built it into a franchiseable format. It will need service models, the ability to track and refine model, a business process that is documented in an operations manual and evidence that their brand is accepted in the market.”
No one-size-fits-all finance option.
Once the bank has ascertained that you are a good risk, then there are many different finance options, depending on your particular circumstances and needs.
For buying the business, for example, they could organise a term loan, whereas the required working capital could be structured into a long-term loan or short-term instrument such as a credit card. If you are running your business from property that you own, a mortgage-based loan could be arranged. Other options, should you qualify, include enterprise development funding – where there is a reduced requirement in terms of your own contributions (as low as 20%) – or BEE funding. Each loan, as well as the interest rates, will be weighed up against your needs and capacity to pay it back.
So, now that you know what to do when deciding on a franchise, what is the one thing you should never do? “Never overestimate the value of your business,” insists Bengu. “Every cent that you borrow has to be paid back. When we ask you to contribute 50% to your business, it is not to push you away. It is to make sure you never put too heavy a burden on your cash flow. Don’t over finance and then go out of business because your obligations are too high.”
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.