Getting finance for franchises is generally easier than for independent start-up businesses. But where can you get your hands on that money? Here are seven ideas on how to finance your franchise…
According to Entrepreneur.com, self-funding is the number one form of financing by most business start-ups in the USA. If you aren’t one of those lucky entrepreneurs with loads of dosh to invest in a franchise, all is not lost. If you’re currently employed, start stashing a portion of your salary in a ‘franchise savings account’. Choose a savings account with good interest rates. Alternatively, you could cash in assets like vehicles or real estate to finance your franchise. While using investments as a source for franchise finance may sound like a good idea, carefully weigh up the risks of investing nest eggs – like retirement funds – in your franchise venture.
2. Soft Loans
Also known as off-balance sheet financing, soft loans are loans granted with a ‘below-market value rate of interest’ (interest rates could be as low as zero). Sources of soft loans include sympathetic family and friends, keen to support you in your quest for self-employment. While soft loans can seem a very attractive franchise finance solution, due to the super-low interest rate and lack of specified repayment terms, be warned – if things turn sour between you and your benefactor, the loan could be recalled at an inconvenient time. If you go the soft loan route, best to specify terms and conditions, and put it in a contract.
3. Business partnership
You could also form a business alliance with another person or entity which can bankroll your franchise venture. But remember the old adage, he who pays the piper calls the tune. Since your business partner is pumping in a proportion of the funds, s/he not only gets to enjoy a share of the profits, but also has a say in how your franchise is managed. Choose business partners who not only have access to funds, but who are easy to get along with, have complimentary business skills and share your vision for the franchise. And don’t think a gentlemanly agreement suffices – get your attorney to draft a partnership agreement.
4. Bank Loans
While financial institutions look more favourably on franchises than independent start-ups, banks have taken firm steps to mitigate the risks associated with money-lending since the start of the recession. In the past, banks might have lent up to 70% of the total franchise set-up costs, but the credit crunch has forced banks to tighten their lending requirements. These days, prospective franchisees need to be able to provide around half of the investment value themselves, and be able to offer the banks greater collateral. Choose a bank with a specialist franchise finance division:
5. Venture Capitalists
Venture capital is financing provided to immature, high potential but high risk start-ups. Where banks may shy away from such start-ups, venture capitalists (sometimes called angel investors) invest in such businesses, eager to take the risk and gain control of what (they hope) will eventually turn out to be a lucrative business opportunity. In exchange for the funding they provide, venture capitalists expect a stake in the company.
Getting Venture Capital Funding: Contact the South African Venture Capital and Private Equity Association.
6. Sweat Equity (Joint Venture)
Financial equity is a contribution in the form of capital; sweat equity is a contribution in the form of effort. If you lack the means to raise the necessary capital, but believe you have what it takes to make a franchise succeed, you could approach a franchisor and suggest a joint venture. It’s a long shot, but if your pitch is on song, you may convince a franchisor to allow you to work your own franchise, and in return the franchisor takes a greater stake in the profits.
7. Government Funding for Franchises
There are government funds which specialize in franchise finance. Preference is given to historically disadvantaged individuals:
Qualifying for finance
You will need to pitch your business plan to potential franchise finance sources, in order to secure franchise finance. Include the following information:
- A description of the product or service the franchise markets
- A brief history or background of the franchise
- Projected cash flow statements for the next 12 months
- A copy of your franchise agreement
- Describe the product or service you intend to produce/market.
Remember: Before you sign on the dotted line, acquaint yourself with the costs of buying and running a franchise.
Author: Franchise Finder, Online Directory of Franchises and Business Opportunities in South Africa